Company founder says strategy lends itself perfectly to ETF active management
The quest for income promises to be a dominant theme in this era of low interest rates. One firm believes it’s a step ahead by virtue of its strategy of marrying the traditional benefits of fixed income with the non-traditional advantages of closed-end funds.
Neil Azous, founder and CIO of Rareview Capital, believes that, used correctly, exposure to closed-end funds can answer that calling. To that end, it has launched two actively-managed ETFs – the Rareview Dynamic Fixed Income ETF (RDFI) and the Rareview Tax Advantaged Income ETF (RTAI).
Azous told WP that closed-end funds are an under-researched niche market, with the largest managers in the world not interested in a structure they feel can’t be scaled to hundreds of billions. The other reason is that, with about two-thirds of the 540 funds in the closed-end universe bond-oriented and a third equity, the average distribution yield in the entire universe is somewhere between 7%-8%.
He said: “It's very nice from a compounding interest effect. When you're thinking about retirement income, you tend to have a longer-term time horizon, meaning you're willing to stay with products through a full market cycle of at least three years, if not five years. That compounding effect can be very powerful.
“The second reason is because it has a high distribution yield, and there's an argument they can potentially help mitigate risk on the downside. That's especially true because a lot of closed-end funds trade at a discount to their net asset value. If you get to buy something at 90 cents on the dollar, and it's giving you a 77 plus per cent distribution yield, that discounted yield is actually substantially higher. That's a pretty good shock absorber in a world that doesn't provide that in other instruments, like the Treasury, at the moment.”
Azous told WP about 90% of them tend to trade at a discount to their net asset value. If the manager is able to buy something at a discount, and that narrow, and then you're naturally able to sell out later, adding on additional total return to the strategy.
He said: “Collectively, they're the only instrument that I'm aware of that you can make money, potentially three different ways. One is the high distribution yield., two is potential principal appreciation, known as market beta, and three is this discount to net-asset-value capture process, which would be termed also as potential alpha generation.
“You've got this nice combination of yield, beta, and alpha, which doesn't exist in any other product that I'm aware of. There are other products that might have those return streams but I haven't seen another one that that provides the ability to have three different sources of return attribution.”
