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By Mike Taggart, CFA | 09-10-2013 10:00 AM

Opportunity Knocking for RiverNorth/DoubleLine Fund

Interest-rate fear is a good thing for the recently reopened RiverNorth/DoubleLine Strategic Income fund, says portfolio manager Patrick Galley, who discusses his comanagement with DoubleLine's Jeffrey Gundlach.

Mike Taggart: Hi. I'm Mike Taggart, head of U.S. closed-end fund research at Morningstar. With me today is Patrick Galley, portfolio manager at RiverNorth Capital Management. Patrick manages about $800 million in closed-end funds.

Patrick, thanks for joining me today.

Patrick Galley: Thanks, Mike.

Taggart: Patrick, you recently have reopened one of your funds that you comanage with Jeffrey Gundlach, the RiverNorth/DoubleLine Strategic Income Fund. It seems to me to be one of the most opportunistic funds out there. Can you talk to me a little bit just about the general investment objective?

Galley: The investment objective is to beat the Barclays Aggregate, predominantly on a risk-adjusted return basis. We're all about risk-adjusted returns at RiverNorth, so the most important objective to us is how much risk you take for incremental return.

Taggart: And how do you measure risk?

Galley: The volatility of the fund and the performance, and if sometimes we do have incremental volatility--but for that incremental volatility, we expect more return.

Taggart: One of the criticisms of the Barclays Aggregate is that it's heavily weighted with Treasuries. So isn't that kind of a little bit of a sandbagging of that index?

Galley: Well, you definitely want to have some type of benchmark that investors can measure you to, and we think the Barclays Aggregate is one of the best-known benchmarks out there. So that's what we chose, because it is a fixed-income-focused fund.

Taggart: My understanding of this fund is that it's essentially two sleeves [that are] very opportunistic. It's your sleeve with opportunistic closed-end fund investing and Jeffrey's sleeve with opportunistic fixed-income investing. Is that fair?

Galley: Yes, actually there [are] three sleeves. So DoubleLine is managing two sleeves. One is the core fixed-income strategy, that is Jeffrey's tactical Barclays Aggregate strategy and just general diversification across fixed-income. That's roughly 50% of the fund on a neutral basis. The other sleeve that DoubleLine is managing is an opportunistic income strategy that's similar to Jeffrey's hedge fund strategy, which is predominantly mortgage-backed securities--nonagency and agency mortgage-backed securities.

Then the third sleeve is managed by us at RiverNorth, and it is an opportunistic closed-end fund strategy, where we're opportunistically investing in closed-end funds when opportunities present themselves, i.e., discounts are widening out. So we'll take from the core fixed-income strategy as our dry powder and increase our closed-end fund sleeve as opportunities present themselves.

Taggart: It seems like this would explain the reopening. There are plenty of opportunities right now, it would seem, and listening to Jeffrey's calls, there are of plenty of opportunities for his opportunistic sleeve. Can you talk to me a little bit about how you decide the allocation decision across those three sleeves?

Galley: It is very opportunistic, and so given the opportunities in closed-end funds--the fear has increased in the closed-fund space, as we know, because of interest rates--discounts have widened out quite drastically. So just a short few months ago, most closed-end funds--fixed-income closed-end funds--traded at a premium to their net asset value. Today, most closed-end funds are trading at a discount to their net asset value and, in fact, only 13% of the time have they ever been wider than they are today on the fixed-income side of the equation on closed-end funds.

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