The NAVigator

Andrew Kerai, senior credit strategist at RiverNorth Capital Management, portfolio manager for RiverNorth Specialty Finance Corp., says that the difficult market has created strong opportunities for increasing the credit quality in bond portfolios, noting that the fixed-income space currently represents a buyer-friendly opportunity unlike anything seen since the Financial Crisis of 2008. He explains how he has re-positioned the portfolio to take advantage of those conditions, and when he expects those decisions to pay off.

Kelly Thompson, founder and editor at Direct Lending Deals, says that business development companies specializing in middle-market lending are facing the pain of some defaults and the potential for restructurings, but she believes that the problems ultimately will make for buying opportunities and better conditions for BDC managers. While waiting for those calmer, surer times, Thompson suggests sticking with older, more-established BDCs, particularly those that rode out the financial crisis of 2008.

Matt Freund, co-manager of Calamos Long-Short Equity & Dynamic Income. says that while interest rates have been positioned lower-for-longer by the Fed, there are still ways to diversify bond holdings to generate income. In addition, he discussed how the fund has been able to tactically navigate the volatile pandemic-impacted market to bounce back sharply from when the market bottomed out.

John Cole Scott, chief investment officer at Closed-End Fund Advisors and the founder of the Active Investment Company Alliance, returns to the NAVigator to compare traits, characteristics and results of closed-end funds with non-listed interval funds offered by the same management company. The analysis -- which you can request by writing to [email protected] -- shows that while interval funds raise some liquidity concerns, they also can create a performance edge in certain market conditions.

Bill Meyers, head of the closed-end business development group at Nuveen Inc., discusses how leverage works in closed-end funds and the types of leverage and rules governing it because leveraged funds -- and their potential to blow up fast when facing trouble -- could scare off nervous investors during volatile times.

Adam McCabe, head of fixed income for Asia and Australia for Aberdeen Standard Investments, said in an interview from Singapore that the countries on the leading edge of the viral economy -- the ones who can awaken from global hibernation first -- will have a mild advantage over nations that quarantine longer, but they won't have all of their trading partners and won't gain any long-lasting benefit. Even when economies have re-started globally, McCabe says recovery likely will be slow as investors try to regain footing amid the 'new normal.'

Nicole Eisenberger, a partner at Ernst and Young, says that the economic shutdown has created conditions making fair-value pricing of illiquid securities and assets difficult and inconsistent, raising uncertainty for investors in business-development companies. Once the first quarter of 2020 ended, firms had more guidelines for using pricing models without tanking their assets, but Eisenberger discusses how the pricing systems work, how it impacts volatility and what BDC investors should expect until there's a return to business as usual.

John Cole Scott, chief investment officer at Closed-End Fund Advisors and the executive chairman of the Active Investment Company Alliance, says that while discounts have narrowed as the stock market has rebounded from its March lows, many closed-end funds and business-development companies remain attractive, with prices well below historic norms. He offers four closed-end funds and one BDC to consider as attractive examples now. 

Cheryl Pate, portfolio manager for Angel Oak Capital, says that the community banking sector is better positioned than most to ride out current market conditions, noting that it has better fundamentals, capital ratios, liquidity and credit quality compared to the last bull market in 2008. While lower rates and a flatter yield curve can be negatives, Pate explains how the leverage she has in managing her closed-end funds is helping to position the issues to weather the market storm quickly.

In this bonus edition of The NAVigator, Eric Boughton, portfolio manager at Matisse Capital discusses how the current market turmoil has pushed discounts to levels even greater than seen in the financial crisis of 2008, and while he expects some dividend cuts, he does not think any distribution reductions should discourage investors. 'Nearly everything is a buy,' Boughton says, though he notes that investors will need a strong stomach for risk to consider the hardest-hit areas of the market.