TBLD: This Underfollowed CEF Looks Like A Good Choice For Income-Seekers

seekingalpha05-24

Thornburg Income Builder Opportunities Trust is a unique closed-end fund that invests in a combination of fixed-income and equity securities.The fund struggles to deliver a yield on par with the best ...

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PonyWang The Thornburg Income Builder Opportunities Trust (NASDAQ:TBLD) is a rather unique closed-end fund, or CEF, that investors can purchase as a source of much-needed income to pay their bills or finance lifestyle expenses. One of the nice things about this fund is that it invests in a combination of fixed-income and equity securities. As I pointed out in a previous article, fixed-income securities arguably cannot deliver a high enough return right now to keep up with the cost of living, so the capital appreciation potential of common equities becomes critical for anyone who is dependent on their asset portfolios. Unfortunately, the problem with common equities is that they have lower yields than fixed-income assets, and so any fund that includes them will struggle to deliver a yield that is on par with the best fixed-income closed-end funds. The Thornburg Income Builder Opportunities Trust is no exception to this rule, as the fund boasts a 7.85% yield at the current price. That compares fairly well to most common equities, but it is much lower than the double-digit yields currently sported by the best junk bond and leveraged loan funds. We can quickly see how low common equity yields are simply by looking at the major indices. As of today, the S&P 500 Index (SP500) has a 1.35% trailing twelve-month yield:   Wall Street Journal The Russell 2000 Index (IWM) is slightly higher than large-cap stocks, and the tech-heavy NASDAQ 100 Index (QQQ) is quite a bit lower than the broad-market indices. Clearly, it will be very difficult to earn an income suitable to fund most lifestyles from a standard common equity portfolio unless you have access to a considerable amount of capital. This is a problem that the Thornburg Income Builder Opportunities Trust aims to fix. While the yield of the Thornburg Income Builder Opportunities Trust is pretty good compared to the equity indices, it is actually not particularly impressive when compared to its peer funds. This can be clearly seen here:   Fund Name Morningstar Classification Current Yield   Thornburg Income Builder Opportunities Trust Hybrid-Global Allocation 7.85%   Calamos Global Dynamic Income Fund (CHW) Hybrid-Global Allocation 8.96%   Clough Global Opportunities Fund (GLO) Hybrid-Global Allocation 11.12%   Guggenheim Active Allocation Fund (GUG) Hybrid-Global Allocation 9.49%   Nuveen Multi-Asset Income Fund (NMAI) Hybrid-Global Allocation 12.87%   PIMCO Global StocksPLUS & Income Fund (PGP) Hybrid-Global Allocation 10.84%   Click to enlarge As we can clearly see here, the Thornburg Income Builder Opportunities Trust has a lower yield than any of the other hybrid fixed-income and common equity funds that invest in securities from issuers all around the world. This might be due to the fund’s strategy, as some of these funds focus more on debt securities than on common equities or vice versa. With interest rates where they are, fixed-income securities can usually provide a bit more in the way of current income, but they are not as good at preserving long-term purchasing power. This is something that we will want to pay attention to over the remainder of this article. As regular readers can likely remember, we previously discussed the Thornburg Income Builder Opportunities Trust in late October 2023. The global equity market since that time has been remarkably strong, although fixed-income securities have generally delivered a mixed performance. In any case, we can probably expect that this fund would have done reasonably well over the period. As we can see here, that has proven to be the case. Shares of the Thornburg Income Builder Opportunities Trust are up 13.79% since the previous article was published. This is an in-between performance of that of the MSCI World Index (URTH) and the Vanguard World Bond ETF (BNDW):   Seeking Alpha This is generally what we would expect from a hybrid fund that invests in both stocks and bonds. After all, the lower performance of the bonds that are held in the portfolio will offset some of the strength of the equities and result in the fund delivering a performance that is between the two types of securities. However, as I pointed out in a recent article: A simple look at a closed-end fund’s price performance does not necessarily provide an accurate picture of how investors in the fund did during a given period. This is because these funds tend to pay out all of their net investment profits to the shareholders, rather than relying on the capital appreciation of their share price to provide a return. This is the reason why the yields of these funds tend to be much higher than the yield of index funds or most other market assets. When we include the distributions paid by the Thornburg Income Builder Opportunities Trust as well as the distributions paid by index funds tracking the two global indices in the chart above, we get this chart:   Total Return Returns This puts the total return of the Thornburg Income Builder Opportunities Trust at 18.5% over the period since we last discussed it. The MSCI World Index comes in with a 25.5% total return, so it still manages to beat the fund, but the difference between the two is moderately less pronounced. The Vanguard World Bond Index delivered a 6.6% total return over the period, which is obviously very disappointing for a seven-month period. We can clearly see the advantage that this fund has over a pure bond fund when it comes to helping to preserve and grow capital. As we are all well aware, though, the past performance of a fund is no guarantee of its future results. As such, we should take a look at this fund as it is today and determine whether it could be a good investment for the future. The fund has released updated financial data since the time of our previous discussion, so that will be a good source of information for us to consult today. About The Fund According to the fund’s website, the Thornburg Income Builder Opportunities Trust has the primary objective of providing its investors with a high level of current income. This makes a certain amount of sense given the fund’s name, but it does not perfectly align with the fund’s strategy. The website includes a great description of the fund’s strategy:  The Trust seeks current income and additional total return by investing in a broad range of income-producing securities to include both equity and debt securities of companies located in the U.S. and around the globe. The Trust additionally expects to employ an options strategy to generate current income from options premiums and to improve risk-adjusted returns. There can be no assurance that the Trust will achieve its investment objective and you could lose some or all of your investment. The Trust will invest at least 80% of its Managed Assets, directly or indirectly, in a broad range of income-producing securities. The Trust will invest in both equity and debt securities of companies located in the United States and around the globe. The Trust may invest in companies of any market capitalization and may invest in both U.S. and non-U.S. countries, including up to 20% of its Managed Assets at the time of investment in equity and debt securities of emerging market companies. The Trust’s global equity allocation is expected to represent 75% of Managed Assets and may vary over time between 50% and 90% of Managed Assets. The Trust’s global debt allocation is expected to represent 25% of Managed Assets and may vary over time between 10% to 50% of Managed Assets.  This description directly states that the Thornburg Income Builder Opportunities Trust will invest in both common equities and debt securities, with the majority of its portfolio consisting of common equities. The website states that currently 61.1% of the fund’s assets are invested in common equities:   Thornburg Investment Management As we saw in the introduction, common equities are not generally good income securities. The iShares MSCI World Index ETF only has a 30-day SEC yield of 1.49%, which is not at all impressive in today’s environment of 5%-yielding money market funds. This makes it very difficult to understand why the Thornburg Income Builder Opportunities Trust would have a current income objective as opposed to total return. After all, the fact that the majority of the fund’s assets are invested in common equity will almost certainly mean that a significant portion of the fund’s investment profits will come from capital appreciation. Capital appreciation is a component of total return, but not of current income, so that objective would make a bit more sense. One thing that we note from the above chart is that the fund has slightly increased its exposure to common equities since the time of our previous discussion. In the previous article on this fund, I noted that the Thornburg Income Builder Opportunities Trust had 59.19% exposure to common equities. Thus, the fund has increased its exposure to these securities by roughly 200 basis points as a percentage of its assets. It is not surprising that the fund’s equity exposure increased over the past seven months. After all, as we saw in the introduction, the MSCI World Index outperformed global bonds during the period by quite a lot. Thus, even if the fund simply followed a buy-and-hold strategy, it would have seen its equity exposure increase over the period. As I stated previously: This does suggest that the fund may be employing a buy-and-hold strategy to a degree though, which makes sense considering that several of the stocks that comprise its largest positions pay sufficient yields for it to not need to rely too much on trading to generate a respectable return, and of course to realize cash that could be distributed to the fund’s shareholders. We will discuss the fund’s stock holdings in just a moment. For now, it is very nice to see that the fund’s exposure to common equities is increasing. Common equities are better at preserving the purchasing power of assets in an inflationary environment, so having a higher equity exposure should mean that the fund will do a better job at this task. With that said, the description of the fund’s strategy from the website specifically states that it targets “income-producing securities” for inclusion in its portfolio. In the case of common equities, that generally means dividend-paying stocks. For the most part, we can see that the fund’s common stock positions are dividend-paying securities, and some of them have fairly high yields. Here are the largest equity positions in the fund:   Thornburg Investment Management Here are the yields of these common stocks:   Company Current Yield   Roche Holding AG (OTCQX:RHHBY) 4.26%   Enel SpA (OTCPK:ENLAY) 6.38%   Orange S.A. (ORAN) 6.52%   AT&T Inc. (T) 6.34%   NN Group N.V. (OTCPK:NNGPF) 6.30%   ING Groep N.V. (ING) 6.71%   Taiwan Semiconductor Manufacturing Co. Ltd. (TSM) 1.24%   Nintendo Co. Ltd. (OTCPK:NTDOY) 1.02%   BHP Group Ltd. (BHP) 4.90%   Mercedes-Benz Group AG (OTCPK:MBGYY) 8.10%   Click to enlarge Some readers might note that the ticker symbols given in the table differ from the ones that the fund lists on its website. This is because not all of these companies trade on an American exchange. When constructing the table, I opted to use the pink sheets symbol that would be used by American investors who wish to purchase the company’s stock using U.S. dollars. The fund is purchasing securities on foreign exchanges when it needs to, as most of these stocks will have more liquidity there. We can immediately see that eight of the ten common stocks listed above have substantially higher yields than the MSCI World Index, and some of them even have yields that compare favorably to those of many investment-grade fixed-income securities. Thus, the fund does indeed appear to be focusing its attention and investment dollars on high-yielding dividend-paying companies. This is a refreshing change from some other equity-income funds that actually have high weightings to the low-yielding American mega-cap technology companies or similar firms that have high valuations and next to no yield. This is attractive from an income perspective, and it also works quite well from a diversification perspective. After all, one of the biggest problems faced by many American investors is that they have outsized exposure to a very limited number of stocks because most fund managers invest in the same securities. This one has a vastly different portfolio, so it could serve well as a diversifier. There have been a number of changes to the fund’s largest positions since the last time that we discussed it. In particular, the fund reduced or eliminated its positions in Pfizer (PFE), Assicurazioni Generali (OTCPK:ARZGF), Meta Platforms (META), Cisco Systems (CSCO), and CME Group (CME). In their place, we have Roche Holding, Orange, AT&T, Taiwan Semiconductor, and Nintendo. That is quite many changes over a seven-month period, and it is admittedly more than would be expected given the fund’s 43.27% annual turnover during its most recent fiscal year. However, the most recent fiscal year actually ended on September 30, 2023, so it is possible that the fund’s annual turnover next during the current fiscal year will come in a bit higher. The fund’s annual turnover is not actually that high when compared to its peers:   Fund Name Annual Turnover   Thornburg Income Builder Opportunities Trust 43.27%   Calamos Global Dynamic Income Fund 114.00%   Clough Global Opportunities Fund 115.00%   Guggenheim Active Allocation Fund 21.00%   Nuveen Multi-Asset Income Fund 46.00%   PIMCO Global StocksPLUS & Income Fund 483.00%   Click to enlarge (All figures are as of the most recent fiscal year for each fund.) As we can see, only one of the fund’s peers has a lower turnover than the Thornburg Income Builder Opportunities Trust. That fund is the Guggenheim Active Allocation Fund, and it is somewhat more bond-heavy than this one. As I have noted in various past articles, bond funds in general tend to engage in a lower level of trading activity than a typical common equity fund, so it is not astounding that the Guggenheim Active Allocation Fund would have lower turnover. Ultimately, the problem with high annual turnover is that it increases a fund’s expenses. This one seems to be doing a pretty good job of keeping its expenses under control, though, as its 1.66% ratio compares fairly well to its peers:   Fund Name Expense Ratio   Thornburg Income Builder Opportunities Trust 1.66%   Calamos Global Dynamic Income Fund 3.68%   Clough Global Opportunities Fund 5.71%   Guggenheim Active Allocation Fund 3.45%   Nuveen Multi-Asset Income Fund 3.68%   PIMCO Global StocksPLUS & Income Fund 3.79%   Click to enlarge As we can clearly see, the Thornburg Income Builder Opportunities Trust has by far the lowest expense ratio out of the peer funds shown here. However, the low expense ratio could be misleading, as the Thornburg Income Builder Opportunities Trust is the only one of these funds that does not use leverage. Thus, it does not have the interest expenses that its peers do. However, even excluding the interest expenses, the fund’s expenses are not too bad when compared to its peers. Distribution Analysis The primary objective of the Thornburg Income Builder Opportunities Trust is to provide its investors with a high level of current income. To this end, the fund pays a monthly distribution of $0.10417 per share ($1.25 per share annually). This gives the fund a 7.85% yield at the current price. The fund has been very consistent regarding its distribution over the years:   CEF Connect From the previous article: As regular readers are certainly well aware, many closed-end funds have been forced to cut their distributions within the past eighteen months or so as weak stock and fixed-income performance have resulted in losses piling up. The fact that this one has not been forced to take that step yet could therefore be quite attractive, especially for those investors who are seeking a stable and secure source of income to use to pay their bills or otherwise finance their lifestyles. However, it is curious that this fund was able to accomplish a task that few others have so we will want to analyze the fund’s finances closely in order to determine exactly how sustainable the distribution actually is. As of the time of writing, the most recent financial report for the Thornburg Income Builder Opportunities Trust corresponds to the full-year period that ended on September 30, 2023. As such, it is not as new as we would really like, given that the period that it covers ended nearly eight months ago. However, it is newer than the report that we had available to us at the time of our previous discussion, so it should still work as an update on the fund’s finances. For the full-year period that ended on September 30, 2023, the Thornburg Income Builder Opportunities Trust received $20,390,012 in dividends along with $9,034,352 in interest from the securities in its portfolio. We need to subtract the foreign withholding taxes that the fund paid over the period, which gives it a total investment income of $28,108,927 for the period. The fund paid its expenses out of this amount, which left it with $19,038,924 available to the shareholders. This was not enough to cover the $40,103,637 that the fund paid out in distributions over the period. The fund was able to make up the difference through capital gains. For the full-year period, the fund reported net realized gains totaling $23,340,904 along with another $62,221,154 in net unrealized gains. Overall, its net assets increased by $64,497,345 over the full-year period after accounting for all inflows and outflows. Thus, the fund managed to cover its distributions over the period. The fund has continued to cover its distributions since the closing date of the report. This chart shows the fund’s net asset value since the closing date of its most recent financial report:   Barchart As we can see, the fund’s net asset value has increased by 9.19% since the end of September 2023. This tells us that the fund has managed to earn more investment profits than it has paid out in distributions. Thus, we probably do not need to worry about the distribution’s sustainability right now. Valuation Shares of the Thornburg Income Builder Opportunities Trust are currently trading at a 14.24% discount to net asset value. This is in line with the 14.78% discount that the shares have averaged over the past month. It is also a reasonably good entry price. Conclusion In conclusion, the Thornburg Income Builder Opportunities Trust is an underfollowed closed-end fund that invests in both common equities and debt securities. The fund’s portfolio is very different from that of most funds, which allows it to provide a good proposition for anyone who is seeking to increase the diversification of their portfolio. Thornburg Income Builder Opportunities Trust managed to cover its distribution fully during the most recent fiscal year and has continued to do so over the past eight months. When we combine this with a very attractive valuation, we see that the fund could be worth buying right now.  Editor's Note: This article covers one or more microcap stocks. 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