01 — Achieve risk-adjusted returns

The goal of investing is to make the most amount of money while taking the least amount of risk or experiencing downside to make it. Institutional investors and professional money managers seek “asymmetric” investment opportunities where the upside is far greater than the downside.  Through intensive research, these institutional investors feel they have an “edge” that gives them conviction in placing their investment bets.

 In the last 30 years in the US, there has been a bull market for both equities and bonds (ie a generally uptrend) which has been supported by loose monetary policy by the Federal Reserve (the “Fed”). By providing plenty of liquidity and increasing the money supply investors have enjoyed a general uptrend in the equity and bond markets; meanwhile, inflation has been mild during this period registering levels below the 2% goal of the Federal Reserve.

Starting in late 2021, however, inflation as depicted by the CPI and PPI has reached a 32 year high of 7% and growing. The Fed initially attempted to calm markets by suggesting this inflation was “temporary”, but now that is has been over a year of acceleration, the Fed realizes it must take measures to combat inflation which is one of its mandates along with trying to achieve full employment.

These 2022 Fed measures include removing the purchases of debt securities each month, reducing its overall balance sheet of debt securities, and rising interest rates.  These actions are antithetical to risk assets in general and most equities and debt securities.   The 10 year US treasury has climbed from 1.3% to now close to 1.9%; forecasters predict 4 to maybe 6 quarter-point increases in the fed fund rate which is currently targeted at zero-.5% to 2-2.5%.

So given this new “brave new world” of higher US interest rates, how can an investor achieve favorable asymmetric fixed income returns against a backdrop of higher interest rates?

Our Answer:

Owning a diverse collection of Closed-end Funds that own corporate bonds, sovereign debt, corporate loans, preferred stocks, municipal bonds, and other income-focused securities while achieving 5-11% annual yields that are paid monthly allowing for compounding of monies.

 For many years, Wall Street and advisors have preached simplicity by structuring portfolios with a mix of equity and bonds.  This split has traditionally been a 60%/40% mix with the bond portion utilized to create “some” income and provide ballast to the portfolio.  Moreover, the term “TINA” (“there is no alternative”) to this 60/40 blend has been the gospel of Wall Street and for their advisors,

 Recently, however, large firms like JP Morgan have suggested that for the next ten years a new portfolio of 40% Liquid Alternatives/ 40% Equity/ 20% Bonds is a preferred portfolio.  According to JP Morgan Asset Management, this new construction could boost returns by 50 basis points per annum.

02 — Diversification

Closed-End funds (CEF’s)are issued through an IPO and are closed from new investors after the IPO. Most closed-end funds use cheap leverage (10-35%) to increase distributions and returns.

Closed-end funds are usually “orphaned” after the IPO, as the Wall Street that issued the IPO no longer makes money after the IPO costs and does not provide research after the fact.  Hence, there are inefficiencies that populate the CEF universe given the dearth of understanding and research in this area.

 This is a huge opportunity for YOU as an investor working with Tabula Rasa Capital.

We see diversification as a critical element of our investment approach to minimize risk.

Most bond CEFs have hundreds of different issuers and TRC focuses on those with larger Assets under management size (usually greater than $200MM) with better liquidity.  With hundreds of issuers if one or two issuers do not pay because of default this diversification strategy mitigates the negative impact to the overall CEF’s.

The two major ways to lose money with bonds are default (ie non-payment of interest) and a higher interest rate environment (unless there is a floating rate feature, fixed rates do not protect against a higher rate environment.  That is why most “safe” bond funds with AAA corporates or AAA munis or government bonds provided negative returns in 2021 and now into 2022.

TRC is focused on corporate loans and other debt that has floating rate features that offset a backdrop of higher rates.

03 — Experience

We have over 30 years of investing experience in non-traditional fixed income. Our team has 10 years of expertise creating customized portfolios using liquid alternative investments for high net-worth individuals. TRC’s CIO has worked as a research analyst from various fixed income firms including Drexel Burnham Lambert and as a Managing Director of a $30 billion Hedge fund.

 The CIO has taken this experience to tailor CEF portfolios that help manage the primary two risks of fixed income investing: default (non-payment) and a rising interest rate environment where the Federal Reserve is raising interest rates.

TRC attempts to manage these difficult fixed income risks by creating a barbell structure of lower default risk income sleeves (High-Grade Corporate and Municipal Bonds for example) with higher-yielding sleeves which provide substantially higher yields than traditional fixed income mutual funds (5-12% versus 1-4% for most fixed income mutual funds).

 TRC’s goal is to achieve a barbell blend that achieves 4-8% annual returns largely through monthly distributions with the possibility of capital appreciation (NAV discount) to achieve total returns possibly higher than this range.

 The eleven sleeves of income generation TRC uses and accesses through mainly CEFs, but some Exchange Rated Funds (ETFs) includes:

• High Yield Corporate and Mortgage Bonds,

• Senior Secured Corporate Loans

• Sovereign Loans

• Municipal Bonds

• Emerging Market Bonds

• Preferred Stocks

• Convertible Bonds

• Real Estate Investment Trusts (REITs)

• Business Development Companies

• High-dividend Cashflow Value Equities

• Call-Writing Strategies

04 — Extensive Research

TRC undertakes a deep dive into each CEF it owns as part of its overall income-focused portfolio customized to meet the risk profile of the client investor.

This analysis includes utilizing Nuveen’s 5-page analysis of each CEF using CEF Connect. CEFConnect provides unbiased, straightforward, and comprehensive closed-end fund information. www.cefconnect.com.

Critical elements include how long the CEF has existed, the experience and track record of the managers, the volume/liquidity of the CEF, the ability to earn the payouts and not make a return of capital, and finally the trend of distributions made on a monthly basis.

Since each CEF is a public company, the CEF managers hold quarterly meetings wherein they announce the distributions for the next three months and allow shareholders to vote on critical issues. TRC’s CIO reviews these materials and acts on the best behalf of TRC’s investors based upon all available public information.