RIV CEF: Modest Returns; 12% Yield Will Lead To Shrinking NAV
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The RiverNorth Opportunities Fund, Inc. (NYSE:RIV) tactically invests in CEFs to capture inefficiencies between the NAV and market price of investment funds. The RIV fund has generated modest historical returns with 5Yr average annual total returns of 4.5%. However, it is currently set to pay investors a 12.2% of NAV distribution yield, which appears unsustainable.
Fund Overview
The RiverNorth Opportunities Fund, Inc. is a closed-end fund (“CEF”) that opportunistically invests in other closed-end funds, special purpose acquisition companies (“SPAC”), business development companies (“BDC”) and exchange traded funds (“ETFs”). The RIV fund aims to capitalize on inefficiencies in the CEF market while offering diversified exposure and high current income.
The RIV fund has $268 million in net assets and may employ leverage to enhance returns. As of January 31, 2023, the RIV fund had $98 million of leverage against $361 million in net assets for 27% effective leverage.
Strategy
The manager, RiverNorth Capital Management, believes that the close-end fund structure offers unique opportunities whereby investors can purchase a diversified fund and potentially generate additional returns from the change in the investment’s market price and NAV.
Portfolio Holdings
Figure 1 shows RIV’s asset class allocation as of January 31, 2023. The RIV fund is primarily invested in fixed income funds (38%), SPACs (21%), and investment company bonds (12%).
Figure 1 – RIV asset class allocation (rivernorth.com)
Figure 2 looks through RIV’s holdings to the asset classes of the underlying funds. RIV’s largest weight is in SPACs (22%), U.S. treasuries (17%), investment company bonds (12%), BDCs (11%), and high yield bonds (6%).
Figure 2 – RIV look through asset class allocation (rivernorth.com)
Returns
Figure 3 shows RIV’s historical returns as of January 31, 2023. The RIV fund has generated modest long-term returns with 3 and 5Yr average annual total returns of 4.0% and 4.5%, respectively.
Figure 3 – RIV historical returns (morningstar.com)
2022 was an off year for RIV, as the fund lost 13.7%. Otherwise, the RIV fund has generated decent high single digit to low double digit returns in 5 of the past 7 years (Figure 4).
Figure 4 – RIV annual returns (morningstar.com)
Distribution & Yield
I believe the main attraction the RIV fund for investors is its distribution yield. The RIV fund pays a high monthly distribution that is currently set at $0.1278 / month for Q1/2023 or 12.9% yield on market price. On NAV, RIV is yielding 12.2%.
Investors should note that with the fund only earning a 5Yr average annual return of 4.5%, RIV’s double digit distribution yield may be unsustainable. In fact, if we look at RIV’s financial summary, we can see the fund has heavily utilized return of capital (“ROC”) to fund its distribution (Figure 5).
Figure 5 – RIV has been funding distribution with ROC (RIV 2022 annual report)
ROC is not necessarily bad; if a fund trades at a steep discount, returning capital to investors may unlock shareholder value. However, over the long run, a fund that cannot earn its distribution must resort to liquidating its NAV to fund distributions. This creates a negative spiral where distributions are increasingly funded from ROC as assets are liquidated. A classic sign of an unsustainable distribution yield is a shrinking NAV (Figure 6).
Figure 6 – RIV has a classic shrinking NAV (morningstar.com)
We can also see that RIV has reduced its monthly distribution from $0.21 in 2018 to $0.17 in 2021, and now $0.1278 in 2023 (Figure 7).
Figure 7 – RIV has cut its monthly distribution to $0.1278 (rivernorth.com)
Fees
The RIV fund charged investors total expense of 1.91% of net asset in fiscal 2022. However, investors should note that with a new investor advisory agreement going into effect in October 2022, the expense ratio may change. RIV is going from a variable expense ratio (where fees such as administrative fees are charged to the fund directly) to a unitary fee model whereby the advisor charges a fixed % fee to the fund and pays the variable fees on the fund’s behalf (Figure 8). Fees from leverage are still charged directly to the fund.
Figure 8 – Proposed change in advisory fee (RIV proxy statement)
Supposedly, the difference to investors should be minimal. But the actual fee rate remains to be seen.
Furthermore, RIV’s fee does not include the fees charged by the underlying funds. Paying fees on top of fees is never a good idea.
Conclusion
The RiverNorth Opportunities Fund, Inc. tactically invests in CEFs to capture inefficiencies between the NAV and market price of investment funds. The RIV fund has generated modest historical returns. However, my main concern with the fund is its 12.2% of NAV distribution yield. Relative to the fund’s returns, the distribution yield appears far too high and unsustainable.