Featuring:
Christian Hoffmann
Portfolio Manager & Managing Director
Thornburg Investment Management
Since Thornburg Investment Management's last conversation with CEF Insights, some market dynamics have changed. Amid resilient economic growth, daunting federal deficits, an upcoming election and other factors, Thornburg's Christian Hoffmann shares the latest views on its global multi-asset strategy for income, potential opportunities, and the broader market outlook for 2024. Listen to the episode and view the transcript below.
Thornburg is a privately held global investment firm delivering on strategy for institutions, financial professionals, and investors worldwide, and offers a variety of products including closed-end funds. Its Thornburg Income Builder Opportunities Trust (TBLD) allocates between global equities and fixed income to support an income stream as well as total return for investors.
Transcript
CEFA:
Welcome to CEF Insights, your source for closed-end fund information and education, brought to you by the Closed-End Fund Association. Today we are joined by Christian Hoffmann, Managing Director with Thornburg Investment Management, as well as Portfolio Manager of Thornburg Income Builder Opportunities Trust, ticker TBLD. Christian, we're happy to have you with us today.
Christian Hoffmann:
Happy to be here.
CEFA:
Christian, can you discuss the investment strategy for TBLD and how the components of this global multi-asset strategy complement each other?
Christian Hoffmann:
Sure. This strategy was created in 2021. When we looked at the space of income investing, we realized that historically, income strategies have had to rely heavily on fixed income or high dividend equities. If you look at those spaces, these were often in cyclicals, particularly on the equity side, and those funds had limited factor diversity.
So given Thornburg's long history in both income investing via global equity and fixed income, it really made sense to combine our collective expertise and really create a product which we didn't see offered in the market. A product that allowed customers to have a high income, but via a more diverse factor of exposure and with more tools than you generally find in most traditional income funds.
So, the three legs of the stool, as a reminder, are global equities, global fixed income, and option writing. So that not only provides us with a diverse source of income, but it allows us to invest in equities of companies that you wouldn't normally find in an income fund, particularly growth companies.
CEFA:
How is the TBLD portfolio currently positioned?
Christian Hoffmann:
The underlying components that we had from day one remains intact. Global equities with diversified factor exposures, a diversified group of fixed income, and the options overlay. But let's talk about how it's changed and evolved. One thing I want to point out is that implied volatility, which is generally how you look at the richness or cheapness of an option, has generally decreased, and you can see that in VIX, particularly compared to 2022, when it was very elevated. So that's a long-winded way of saying that the compensation you're paid for option writing has significantly decreased since we launched. So, it's not surprising that you would see us writing less options.
Another thing that I'd point out, we didn't know it at the time, but when we launched this fund in July of '21, that was very close to all-time highs in terms of what you saw in fixed income. So, we worked very hard to structure a fixed income portfolio yielding over 4%. Again, this was when high yield was not even yielding 4%. Today you can get that buying treasuries. So, it's a much richer option in terms of the fixed income landscape and choices that we have there. So, it's not surprising to see us do more fixed income and fixed income that we didn't have available to us when we launched the fund. This really speaks to the flexibility of the fund and our ability as a team to leverage opportunities in the marketplace as market conditions evolve.
Thinking about how we generated income last year, roughly half came from our equity portfolio, about a third came from our fixed income book, and the rest came for options. So, you continue to see each sleeve contribute to the overall generation.
CEFA:
How active is the option writing component for your strategy, and what range of exposure would you typically expect for this component?
Christian Hoffmann:
We talked about that a little bit, the evolution of fixed pricing, and the volatility that you see in the marketplace. I think the max that we saw was in 2022 at around a quarter of the portfolio, or 25%. Today, we're sitting closer to 10%. So, it's only natural that you would see this really wax and wane depending on market conditions. I think there's a fair case that we will see volatility pick up in the rest of the year, and I think we would look to increase our overlay into that environment. But again, the fixed income book and even the investment we get from our cash, we're getting almost 5.5% on our cash today. That was closer to zero when we launched. So again, just speaks to the evolution of the fund and the opportunities.
CEFA:
TBLD has not utilized leverage in managing the portfolio. Is the use of leverage something the fund would consider in the future?
Christian Hoffmann:
It's something that we have the availability to do. We have not used leverage to date, and again, we launched in 2021. Our view is that most of our competitors use leverage wrong. That's to say that in a very rich market when valuations are stretched, when it's hard to get income, when it's hard to generate returns, people use leverage to try to meet a target, but they're often doing that at the top of the market. So, when things turn down, when things sell off, not only are you experiencing the price deterioration, but you're experiencing it from a levered position.
If you look at our competitors that were levered at the top of the market, both the sell-off and the discount in NAV that you see on those funds looks particularly brutal at this point in time. You're also looking at, again, a Fed funds rate of over 5%, and if those funds are paying a margin on top of that, that is a huge cost of carry, especially relative to high-cost positions that are currently underwater.
So, we really took the opposite approach that we want to stay away from leverage when things look expensive or rich, if the market has a liquidity problem, if things become extremely oversold, we see that as another tool that we could use to generate value for our shareholders. But given the fact that we've had that in our tool bag but haven't used it throughout these market conditions, I think really speaks to the prudence and conservatism of this team and the reticence to use it when we feel that the risk reward is just extremely in our favor.
CEFA:
Christian, the Federal Reserve appears to be at the end of its rate-hiking cycle, inflation remains elevated, economic growth has been resilient but federal deficits are daunting. We also have significant geopolitical tensions that impact markets, and we have US federal elections in November. Where do you see the investment markets currently and what is your outlook for 2024?
Christian Hoffmann:
It's very easy to imagine the 10-year oscillating between, say, 3.5% and 4.5%. We've seen that in the recent history. It's also not hard to paint scenarios where we touch 3% or even 5% again, which we saw not long ago. As I look at my screens today, we're trading around 4.15% on the 10-year. That isn't horrible, especially relative to that range that I mentioned. As a team, we spend a lot of time looking at real rates as well. Today, you're getting over 1.8% on the 10-year and even 2.1% on the 30-year. This is extremely attractive relative to recent history, but even relative to a normalized cycle to a longer period of time, this is still certainly outside of the average and remains pretty compelling. On the other hand, valuations and credit spreads, particularly into this recent rally, don't appear to be pricing anything other than a soft landing and what people are calling immaculate disinflation. It's really our base case that we'll see both of those concepts challenged in 2024.
CEFA:
When we spoke with your colleague Ben Kirby a few months ago, he noted that areas of fixed income had become much more interesting. Are you still finding that to be the case?
Christian Hoffmann:
It is, but much less than what we saw in both the fall of 2022 and the fall of 2023. I think one thing that we did successfully well with this fund is that we started with a healthy amount of credit risk and very low duration risk when we launched, and that credit risk was something that we did really from the bottom up, and through our detailed work, we felt we could rely on that while relying on interest rates to remain low, given that they were all time lows, didn't seem to be an advantageous position to launch the fund. As we saw interest rates rise, normalize, and correct, we took advantage of that positioning to both increase duration to more normalized levels and also to decrease the credit risk, as we had less need to do that to still generate our bogey and generate returns for shareholders.
Fall of '22 and '23, from a timing perspective, the selloff and rebound felt very much the same, although I would point out that fall of '22, there was a tremendous amount of credit weakness, while '23 was more print-out with rate volatility and in core rates. Both of those were opportunities. We saw more opportunities to add credit in '22 and more opportunities to add duration in fall of '23. We got to almost five in duration on the fixed income portfolio, and we have backed that off into this recent strength as, again, we expect continued volatility and think we'll get more bites of the apple.
CEFA:
Where are you seeing the best opportunities in this market, both on the fixed income and equity side?
Christian Hoffmann:
This fund, it's not surprising to see it overweight in international equities. Part of the reason there is that international markets tend to have much higher dividend yields than the US, even for comparable companies, even for companies operating in similar environments with similar growth rates. Part of that is for tax law, part of it's for historical reasons, but it's not surprising to see an international dividend company as something that's going to be attractive. I might also point out that the valuations there are much less challenging than what you see in the US at this point of time.
If you look at Europe, that market's trading at about 12 times forward earnings. Compare that to 19 - 20 for the S&P 500. That's a 30% disconnect for longer-term PE. Historically, it's been closer to something like, maybe, 15 to 20. So, we're doing bottom-up work. We're picking stories that we like, and that's not a bold macro call, but I think it does still speak to an attractive entry point. Even today, for investors, we've had a recent history of a tremendous amount of dollar strength as well. I think having access to currencies besides the dollar, I think will also decrease volatility and provide ballast and some nice upside potential for investors, particularly at this entry point right now.
CEFA:
Christian, as investors consider the allocations of their diversified portfolios or income-oriented portfolios, how do you see a global multi-asset strategy like TBLD best positioned in those investor portfolios?
Christian Hoffmann:
So, we have a great Client Portfolio Manager, and again, we find folks to talk to him, but just my 2 cents would be that we see clients use this fund in a variety of ways. Certainly, one easy way is a core part of an income portfolio or income sleeve. As I look at the screen today, the distribution yield at cost is currently around 8% based on the trading level. Again, that's based on the healthy income generation of the fund, but also the discount to NAV which investors buying today have access to.
Another thing that I thought would be tough for us, but it's something that I've been very pleased on what we've still delivered, is the qualified dividend income that we get via our equity component. So for folks that really want to get in the weeds, I would offer them to compare the QDI or qualified dividend income of our fund relative to other funds, which maybe just generating pure income because the after-tax effect of that can be very notable and something that investors should consider that's relative to some of our equity fund competitors and then also relative to fixed income funds.
We see other folks that use it as a proxy for global equity allocation. Since its inception in 2021, the fund's NAV return has resembled the broader global equity market, but with less volatility because of the bonds, the option overlays, and dividend-paying equities. I think for opportunistic investors generally, if you look at the discount today on the fund, that remains attractive. Given that this is a closed-end fund 2.0 structure, that's not something that should exist in perpetuity, that there are mechanisms to close that over time. So, I think folks also need to weigh that versus the 1.0 structure, where there isn't necessarily a mechanism for that discount to close.
CEFA:
Christian, thank you for taking the time to share your thoughts with us today.
Christian Hoffmann:
Thanks for having me.
CEFA:
We want to thank you for tuning into another CEF Insights podcast. For more educational content, please visit our website at www.cefa.com.
Podcast recorded January 2024.
Disclosure
This material is not, and is not intended as investment advice, an indication of trading intent or holdings, or the prediction of investment performance. All fund-specific information is the latest publicly available information. All other information is current as of the date of this presentation. All opinions and forward-looking statements are subject to change at any time.
Thornburg disclaims any responsibility to update such views and/or information. This information is deemed to be from reliable sources; however, Thornburg does not warrant its completeness or accuracy. This presentation is not intended to and does not constitute an offer or solicitation to sell or a solicitation of an offer to buy any security, product, investment advice or service, nor shall any security, product, investment advice or service be offered or sold in any jurisdiction in which Thornburg is not licensed to conduct business and/or an offer, solicitation, purchase or sale would be unavailable or unlawful.