Thornburg Income Builder Opportunities Trust: Multi-Asset Portfolio
Thornburg Income Builder Opportunities Trust (NASDAQ: TBLD) is a new CEF in the Thornburg family of funds. The vehicle is new, having been floated in July 2021. The fund pursues a multi-asset strategy:
The Trust will invest at least 80% of its assets under management, directly or indirectly, in a wide range of income-producing securities. The Trust will invest in both equity and debt securities of companies located in the United States and around the world. The Trust may invest in companies of any market capitalization and may invest in US and non-US countries, including up to 20% of its assets under management at the time of investment in equity and debt securities of companies of Emerging Markets. The Trust’s global equity allocation is expected to represent 75% of assets under management and may vary over time between 50% and 90% of assets under management. The Trust’s overall debt allocation is expected to represent 25% of assets under management and may vary over time between 10% and 50% of assets under management.
Currently, the CEF currently owns approximately 70% stocks and 30% bonds, but it has the mandate and the flexibility to change this allocation. In addition to outright assets, the fund features a nice, interesting overlay of written calls:
The Trust’s options strategy aims to generate current income from option premiums and to enhance its risk-adjusted returns. The notional amount of the options strategy will be approximately 10% to 40% of the Trust’s assets under management.
We like this approach because writing covered calls can act as a buffer in bear markets. It will be interesting to see how the fund allocates this option overlay when the market turns – i.e. in rising markets, writing covered calls can significantly reduce the upside of a portfolio. . The fund is not perpetual but has a term structure:
The Trust does not intend to use leverage and has a term of 12 years.
Since the vehicle has just been listed on the stock market, we are not very concerned about its original maturity date. Like other equity CEFs, the vehicle currently has no leverage.
The fund is new and has lost value since its issuance, given its valuation near the top of the market. However, we like its build and approach. Incorporating an options overlay into a multi-asset structure is a good risk management tool and profit generator in a bear market. The fund is working to build a balance sheet, but the ingredients are there for a strong future. Although technology is currently overweight on the equity side, the vehicle chooses names with low P/E ratios.
The CEF currently owns around 70% stocks and 30% bonds:
On the equity side, the fund is overweight technology:
Although technology is a sore point at the moment, the fund seems to be doing a good job picking low P/E companies:
At a sub-10x P/E ratio, it feels like a very conservative build. Additionally, we like that the fund only has 58 holdings. When we look at the top fund concentrations, we like what we see:
The fund holds larger positions in energy and materials companies, which have held up better in the current environment. In addition, another advantageous aspect is the written options component:
Approximately 11.5% of the portfolio has written call options. This is a conservative strategy that generates cash in a bear market. As the market sells off, the written calls expire worthless and the fund pockets the premium. It would be interesting to see what the fund will do once the market turns – this strategy can cap the upside in a sustained rise in stock prices. However, we are a bit far from it at the moment.
On the bond side, the fund invests mainly in high yield securities:
We can therefore say that the main risk factors on the fixed income side are credit spreads rather than rates. The bond portfolio is also quite compact, with the fund providing fairly detailed statistics:
We can see that the vehicle only contains 111 names, with a fairly advanced effective expiration date of only 6.2 years.
The fund has been down since the start of the year:
The vehicle is down more than the S&P 500 since the start of the year due to the widening of the net asset value discount, but its performance is in line with the movement of the BlackRock Capital Allocation Trust (BCAT).
Premium/Rebate to NAV
During its brief existence, the fund has always traded at a discount:
That’s to be expected of a new CEF, especially a vehicle that was IPO at the top of the market. If an investor looks at the historical performance of CEF, they will notice a funny commonality – they all tend to lose money in the first 1-2 years. A CEF usually costs $20/share, but usually ends up going down. Not all CEFs are created equal, of course, but since inception there has been some pressure on the management team to allocate capital regardless of timing, which may not be optimal for the end investor. .
Examining very well-established managers such as PIMCO or BlackRock (BLK), particularly on the fixed income side, provides good insight into this nascent vehicle behavior. Again, our view here is that the manager is under significant pressure to make their cash work to justify the fees charged and in doing so they are investing at sub-optimal times.
The fund appears to have a managed distribution plan, although we couldn’t find any detailed description in the annual and semi-annual reports regarding this feature:
Note that the same amount is paid monthly, although the fund does not currently generate a 9.5% return through its assets. Instinctive control is quite simple – the fund contains 70% stocks that generated losses in 2022 and a small return of 1.5% to 2%. The bond portion, which represents 30% of the fund, generates a coupon of approximately 6.5%. The calculations do not add up, so we believe that more than 50% of current distributions are ROC. The fund does not publicly provide a statement under Section 19a to be presented.
TBLD is a new multi-asset CEF. The vehicle is currently trading at a discount due to its lack of track record and underperforming holdings. We like the fund’s composition and granularity, as well as the covered call overlay feature. From a fundamental perspective, the portfolio and approach are solid, but just like other CEFs that were priced at the top of the market, TBLD was initially expected to underperform. Given its lack of performance, the fund is currently using a large amount of ROC to subsidize its 9.5% return. The fund’s year-to-date performance is largely in line with that of another multi-asset fund we’ve discussed, namely BCAT. We expect a much stronger year 2023 for the fund and want the fund to establish an identity and performance history so that insights can be extracted regarding its risk/return profile.