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By Mike Taggart, CFA | 02-17-2011 02:26 PM

Where the Fixed-Income Closed-End Fund Opportunities Lie

RiverNorth's Patrick Galley believes that increasing muni-bond fears are creating buying opportunities in the closed-end fund market.

Mike Taggart: Hi. I'm Mike Taggart, closed-end fund strategist at Morningstar. With me today is Patrick Galley. Patrick is a portfolio manager on the RiverNorth Core Opportunity open-end mutual fund. It carries a five star rating.

Patrick, thanks for joining me.

Patrick Galley: Thanks Mike.

Taggart: Patrick you recently launched a new open-end fund with Jeffrey Gundlach. He is a former Morningstar Fixed Income Manager of the Year. I was wondering if you could us tell us a little bit about that fund to start off with.

Galley: Sure, it's the RiverNorth/DoubleLine Strategic Income Fund. Jeffrey Gundlach recently formed DoubleLine. DoubleLine is a fantastic fixed-income team. The fund is unique blend of both firms' niche strategies. So DoubleLine is going to be a subadvisor for the fund. RiverNorth is the investment advisor. RiverNorth is going to be running a closed-end fund strategy inside the fund for approximately 25% of the portfolio.

Taggart: So 25% of the capital is in your hands, and you're going to be investing it across fixed income closed-end funds, right?

Galley: That's right. Yes. The fund's general objective is total return and income, so we're going to be focusing on the income universe of closed-end funds. There are approximately 440 fixed-income closed-end funds yielding over 5% today. So we think it's a great opportunity to take advantage of that space.

Taggart: Can we sit back for a second and just say, if we were to take this outside of this particular fund. I mean I think this is fascinating that this strategy you have and that's why I asked you over today. Just thinking as an individual investor, why would they want to allocate some of their own portfolio capital to fixed income closed-end funds?

Galley: First of all, closed-end funds are great way to take advantage of the inefficiencies that might be out there in the universe. Closed-end funds, as you know Mike, trade at discounts and premiums to net asset value. That difference is an opportunity for us to take advantage and generate additional return.

What I mean by that is, if the discount narrows on a closed-end fund, we are generating an additional return or excess return, what we call alpha, which is above and beyond the underlying asset's performance. So in times of fear and greed, that trading closed-end funds plays well into our strategy.

In addition, even if you own a fixed income closed-end fund trading at a deep discount, you are getting an additional return as well. So, for example, a fund that yields 10%, if it's trading at a 15% discount, you're actually going to be getting 17% additional return from its underlying assets.

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