Portfolio Manager Perspectives

Jeff Benjamin

RiverNorth Capital's Patrick Galley: Secured bank loan assets still look good

Jan 22, 2010 @ 12:01 am

By Jeff Benjamin

A 48% allocation to equities reflects a cautious outlook for the stock market by Patrick Galley, manager of the RiverNorth Core Opportunity Fund (RNCOX).

“We believe equities are relatively fairly valued right now,” he said. “But we still haven't had retail investors embrace the rally.”

The potential impact of a sweeping retail investor move into stocks — something the market has been anticipating for almost a year — could represent the next leg of the rally.

But until that happens — and it could be awhile, given this week's market sell-off — Mr. Galley will continue to take what the market is giving him.

“We still like secured bank loan assets,” he said.

In order to enhance the fund's equity weighting he has also turned to certain equity hybrids, including convertible bonds.

The $305 million fund from RiverNorth Capital Management LLC is also able to enhance its equity exposure through the leverage applied by many of its underlying holdings, namely closed-end funds.

The fund is one of the only mutual funds to rely almost exclusively on closed-end and exchange-traded funds.

The strategy begins with a quantitative overview to determine an appropriate allocation for the desired balanced portfolio.

From there, the various allocation slots are filled with closed-end funds or ETFs.

In some respects, the ETFs are used as placeholders for specific allocations, because the real alpha is being generated by the trading of closed-end funds.

Once the investment categories are set, Mr. Galley and his team start screening the more than 400 taxable closed-end funds to identify ones with a narrowing discount between share price and net asset value.

With about 80% of all closed-end funds trading at a discount to their net asset value, there are plenty of choices. But the goal is to identify catalysts such as mean reversion, corporate actions or shareholder activism that could force a narrowing of the discount.

“We try to generate return from a favorable risk-adjusted portfolio and we try to invest in funds that are facing a discount-narrowing event,” Mr. Galley said.

So far, so good.

The fund earned its five-star rating from Morningstar Inc. last month after reaching its three-year anniversary.

In 2009, the fund gained 48.9%, which compares with an 18.4% gain by the benchmark, which combines 60% of the S&P 500 and 40% of the Barclays Aggregate Bond Index.

Portfolio Manager Perspectives are regular interviews with some of the most respected and influential fund managers in the investment industry. For more information, please visit InvestmentNews.com/pmperspectives .


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