TBLD: Fund Might Have Sacrificed Some Equity Upside, But Still A Good Diversifier

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Thornburg Income Builder Opportunities Trust offers a 7.49% current yield, higher than index funds but lower than peers.The Fund invests in diverse assets, allowing it to improve the diversification ...

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It may be helpful for those investors who are seeking to generate a respectable level of income from the assets in their portfolio while adding a noticeable amount of diversification to it. The fund does reasonably well at the provision of income as its 7.49% current yield is higher than just about any index fund. However, it is not especially high when compared to most of the fund's peers:   Fund Name Morningstar Classification Current Yield   Thornburg Income Builder Opportunities Trust Hybrid-Global Allocation 7.49%   Calamos Global Total Return Fund (CGO) Hybrid-Global Allocation 8.44%   Clough Global Opportunities Fund (GLO) Hybrid-Global Allocation 10.89%   Eaton Vance Tax-Advantaged Global Dividend Opportunities Fund (ETO) Hybrid-Global Allocation 8.04%   LMP Capital and Income Fund Inc (SCD) Hybrid-Global Allocation 8.28%   Virtus Total Return Fund Inc. (ZTR) Hybrid-Global Allocation 10.38%   Click to enlarge As we can clearly see, the Thornburg Income Builder Opportunities Fund has a lower yield than any of its peers with the same hybrid classification. This is, admittedly, something that may discourage potential investors from purchasing shares. After all, many, if not most, people who would even consider looking at a fund like this have the primary goal of maximizing the level of income that they receive from the assets in their portfolios. As such, a fund with a lower yield than its peers would not ordinarily merit consideration. However, as we will see in this article, the Thornburg Income Builder Opportunities Trust invests in very different assets than many of its peers and as such it could still offer a lot to most investors. We all strive to have a diversified portfolio to reduce our risks. As regular readers might remember, we previously discussed the Thornburg Income Builder Opportunities Trust back in late May 2024. Global equity markets have been remarkably strong since that time, which has been partially driven by various central banks either implementing monetary easing or expected to do so shortly. Later today, Chairman Powell is giving a speech at the Jackson Hole conference, and futures are already up in anticipation that he will strongly hint at an interest rate cut in September. This stands as evidence that the anticipation of monetary easing has been a significant driving factor for global asset appreciation even as a few economies have started to show signs of weakness. As such, we can probably assume that the Thornburg Income Builder Opportunities Trust has delivered a fairly strong market performance since our last discussion. This assumption is correct, as shares of the fund have appreciated by 5.50% since our last discussion: Seeking Alpha As we can immediately see, the fund underperformed the S&P 500 Index (SP500) over the period. However, the underperformance was only a mere 25 basis points. Perhaps more importantly, though, is that the fund was much more stable than the index. It was not significantly impacted by the market volatility earlier this month that ensued following an attempt by the Bank of Japan to raise its benchmark interest rate. This low volatility compared to the market might be attractive to some investors, most notably retirees who are trying to live on their investments. However, the above chart does not provide a complete picture of how investors in this fund actually did during the period. As I stated in my previous 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. As the distributions provide an additional return to the investors, we need to include them in our performance chart. When we do that, we get this alternative performance chart that shows how the fund's investors truly did: Seeking Alpha This certainly reflects well on the fund. As we can see, investors who purchased the Thornburg Income Builder Opportunities Trust when I issued my buy rating three months ago have beaten the S&P 500 Index by quite a bit. This should redeem the fund according to all those who are disappointed by either its low yield relative to peers or the fact that the share price alone has not kept up with the domestic large-cap market. Overall, investors in this fund are now better off than they would have been had they bought shares in a large-cap index fund. As three months have passed since our last discussion on this fund, it would be natural to assume that several things have changed. In particular, the Thornburg Income Builder Opportunities Trust has released an updated financial report detailing its performance for the first half of its fiscal year. We will want to pay special attention to that over the remainder of this article, as its financial performance is critical to its ability to sustain the current distribution. 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 and total return. This objective makes a certain amount of sense given the fund's strategy. This strategy is explained in detail on the website, which is a nice change from a few of the other funds that we have discussed recently. From the website:  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% to 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. The Trust's options strategy is intended to generate current income from options premiums and to improve its risk-adjusted returns. The notional amount of the options strategy will be approximately 10% to 40% of the Trust's Managed Assets.  As this description clearly states, the Thornburg Income Builder Opportunities Trust will aim to have about 75% of its Managed Assets invested in equities issued by domestic and foreign entities. The fund's semi-annual report lists its current asset allocation as:   Asset Type % of Net Assets   Common Stock 60.8%   Preferred Stock 0.4%   Asset-Backed Securities 2.8%   Corporate Bonds 17.7%   Non-U.S. Government Bonds 0.7%   U.S. Treasury Securities 2.4%   U.S. Agency Securities 0.2%   Mortgage-Backed Securities 6.9%   Short-Term Investments/Money Market 5.3%   Click to enlarge This chart shows the fund's asset allocation as of March 31, 2024, which is the most recent date for which information is currently available. As we can see, the fund is currently failing to hit its stated 75% of assets invested in common equities. However, the equity allocation is still within the allowable 50% to 90% of assets range. The conclusion here is that the fund's management does not believe that equities are a great investment right now, or that they were not a terrific investment back in March. This has proven to be incorrect, as the S&P 500 Index is up 6.24% since March 31, 2024, and the iShares MSCI World ETF (URTH) is up 5.69%: Seeking Alpha Bonds are also up since that time but to a lesser extent:   Index/ETF Price Appreciation Since March 31, 2024   iShares Core U.S. Aggregate Bond ETF (AGG) 3.48%   SPDR® Bloomberg High Yield Bond ETF (JNK) 2.26%   Vanguard Total World Bond ETF (BNDW) 2.72%   Click to enlarge This suggests that the fund may have been better off weighing stocks more heavily than bonds, as it sacrificed some gains. An allocation of 75% common stocks and 25% bonds would have delivered higher returns over the period. This remains true even after we include the coupon payments made by the bonds in the indices, as shown here:   Index/ETF Total Return Since March 31, 2024   Bloomberg U.S. Aggregate Bond Index 4.77%   Bloomberg High Yield Very Liquid Index 4.60%   Vanguard World Bond ETF 3.76%   Click to enlarge Thus, the fund almost certainly would have been able to earn a better return by running a stock allocation higher than what it had on March 31, 2024. This is not to imply that stocks are cheap, or that they were cheap a few months ago. Indeed, many indicators have been saying that U.S. stocks are overpriced for quite some time now. One of these indicators is the stock market capitalization-to-GDP ratio, which is explained in Investopedia:  It is a measure of the total value of all publicly traded stocks in a market divided by that economy's gross domestic product. The ratio compares the value of all stocks at an aggregate level to the value of the country's total output. The result of this calculation is the percentage of GDP that represents stock market value. … Typically, a result that is greater than 100% is said to show that the market is overvalued, while a value of around 50%, which is near the historical average for the U.S. market, is said to show undervaluation. If the valuation ratio falls between 50% and 75%, the market can be said to be modestly undervalued. Also, the market may be fairly valued if the ratio falls between 75% and 90%, and modestly overvalued if it falls within the range of 90% and 115%.  As of right now, the stock-market capitalization-to-GDP ratio is at 195.9%, which according to this metric is substantially overvalued. In fact, it is, right now, the most overvalued that it has ever been in history: GuruFocus We can see that the ratio has not been below 100% since 2013. This may lead one to believe that this ratio no longer works as a valuation indicator, but that is not the case. Stocks may remain overvalued for a very long period of time, as apparently has been the case for more than a decade. Please note that I am not predicting an imminent stock price collapse here. There can be an excellent case made for equities continuing to appreciate due to their potential to protect against inflation. As I stated in a previous article: One of the nice things about this fund is that it invests in equity securities, so it provides a certain amount of protection against inflation, which may be a bigger problem going forward than it has been in the past. After all, the projections for large fiscal deficits are well known, and it is difficult to see any way for these deficits to be funded by any method apart from the creation of new currency. Historically, equities, real estate, and gold have been the best ways to preserve the purchasing power of your money against inflation. The Congressional Budget Office is currently projecting fiscal budget deficits totaling $20 trillion over the 2024 to 2034 period, which would represent the largest budget deficits ever as a percentage of gross domestic product outside a major war. The Federal government will almost certainly struggle to cover these without some sort of debt monetization by the Federal Reserve, which would drive inflation. As such, it is a sure bet that inflation will not go away for any sort of extended period going forward. This could be a tailwind for common equities, as investors both in the U.S. and abroad buy them up in an attempt to protect their wealth against this inflation. Thus, common equities could become even more overpriced in the coming years. The point here is to illustrate that even though the management of the Thornburg Income Builder Opportunities Trust apparently missed out on opportunities to earn higher returns by weighting equities more heavily than bonds over the past five months or so, the apparent conclusion that the stock market was not a great place to park capital back at the end of March was not necessarily an unsupported conclusion. Recent Portfolio Changes Here are the largest positions in the fund as of the time of writing: Thornburg As I mentioned in the introduction, the Thornburg Income Builder Opportunities Trust invests in different assets than other closed-end funds. This allows it to serve as a diversifier for other funds that own the same stocks. For example, as we have seen in various previous articles, most equity closed-end funds own stock in at least a few of the \"Magnificent 7\" stocks - Microsoft Corporation (MSFT), Apple Inc. (AAPL), NVIDIA Corporation (NVDA), Tesla, Inc. (TSLA), Alphabet Inc. (GOOG), (GOOGL), Meta Platforms, Inc. (META), and Amazon.com, Inc. (AMZN). This is because these stocks have been responsible for an outsized proportion of the total return of the S&P 500 Index over the past fifteen years. I discussed this in a few recent articles (see here and here) and various other market analysts have commented on the dominance of these stocks (see here). As such, many fund managers believe that the portfolio of their fund needs to have a large exposure to at least a few of these companies to deliver a return that is acceptable to the fund's investors. Therefore, most funds include at least a few of these companies among their largest positions. This means that an investor who owns multiple funds will not be particularly diversified because all of those funds will be holding the same handful of stocks. The fact that the Thornburg Income Builder Opportunities Trust holds a radically different portfolio thus allows this fund to be included in a portfolio alongside other funds and improve the portfolio's diversification. This alone might be a reason to purchase shares in this fund. The fund's strategy description from the website explicitly states that the Thornburg Income Builder Opportunity Trust invests in income-producing securities. In the case of common stocks, that ordinarily means that they pay a dividend. In fact, many of the stocks held among this fund's largest positions pay dividends that are larger than the market average, as shown here:   Company Current Dividend Yield   Roche Holding AG (OTCQX:RHHBF) 3.05%   Orange S.A. (ORAN) 6.87%   Enel SpA (OTCPK:ESOCF) 6.37%   AT&T Inc. (T) 5.69%   NN Group N.V. (OTCPK:NNGPF) 5.91%   BHP Group Limited (BHP) 5.60%   Nintendo Co., Ltd. (OTCPK:NTDOF) 2.47%   Taiwan Semiconductor Manufacturing Company Limited (TSM) 1.31%   Snam S.p.A. (OTCPK:SNMRF) 7.51%   Deutsche Post AG (OTCPK:DPSTF) 4.72%   Click to enlarge As of the time of writing, the MSCI World Index has a trailing twelve-month yield of 1.50%. Thus, we can see that the only one of these companies that currently has a lower yield than the index is Taiwan Semiconductor Manufacturing. This certainly seems to fit with the fund's theme of providing its investors with a high level of current income, as these securities will pay the fund outsized yields that it can then distribute to its investors. The sole exception here is Taiwan Semiconductor Manufacturing, but we can mostly excuse that due to the company's growth prospects. As we can see here, Seeking Alpha analysts, Wall Street analysts, and the Seeking Alpha Quant Tool all rate this company as a buy or a strong buy: Seeking Alpha This is mostly driven by the company's dominance in the manufacturing of semiconductor chips that are needed for generative artificial intelligence. The company manufactures processors for Intel Corporation (INTC), Nvidia, and others. Nvidia is projected to sell massive numbers of these processors over the coming years due to the desire of everyone to have generative artificial intelligence, and as the manufacturer of these chips, Taiwan Semiconductor Manufacturing should also benefit. The fund's reason for investing in the company is probably because management sees this growth potential and expects that the company will be able to raise its dividend going forward. If this scenario plays out, the fund should be able to realize an attractive yield on cost as well as some capital gains. There have been two significant changes to the fund's largest positions list since the last time that we discussed it. These are that ING Groep N.V. (ING) and Mercedes-Benz Group AG (OTCPK:MBGAF) were both removed from their former positions among the fund's largest holdings. In their place, we have Snam SpA and Deutsche Post. There were also a few changes to the weightings of the various securities in the fund's portfolio, but these could easily be explained simply by one security outperforming another in the market. It is not necessarily a sign that the fund actively engaged in trading that increased or decreased its position to a given security. The fund had a 28.06% annual turnover rate for the first six months of the fiscal year 2024, so it is not engaging in an enormous amount of trading activity that constantly changes the weightings and holdings of the portfolio. This makes sense given that this fund seems to have a \"buy-and-hold\" theme. 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 $0.1042 per share ($1.2504 per share annually). This gives the fund a 7.49% distribution yield at the current share price, which as we have seen is good compared to the indices but is well below what its peers pay out. The fund has been remarkably consistent with its distributions over its history, however: CEF Connect From my previous article on this fund: As regular readers are certainly well aware, many closed-end funds have been forced to cut their distributions within the past two years or so as weak stock and fixed-income performance in 2022 and 2023 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 fund's most recent financial report is the semi-annual report for the six-month period that ended on March 31, 2024. A link to this report was provided earlier in this article. This is a newer financial report than the one that was available to us at the time of our last discussion on this fund, which is nice because it should work pretty well as an update. For the six-month period that ended on March 31, 2024, the Thornburg Income Builder Opportunities Trust received $8,418,357 in dividends and $4,992,953 in interest from the assets in its portfolio. From this amount, we subtract the money that the fund had to pay in foreign withholding taxes, which gives it a total investment income of $12,897,248 for the period. The fund paid its expenses out of this amount, which left it with $8,294,799 available to shareholders. That was not sufficient to cover the $20,051,819 that the fund paid out in distributions during the period. Fortunately, the fund was able to make up the difference through capital appreciation. For the six-month period that ended on March 31, 2024, the Thornburg Income Builder Opportunities Trust reported net realized gains of $11,499,949 along with $44,952,889 of net unrealized gains. Overall, the fund's net assets increased by $44,695,818 after accounting for all inflows and outflows. Clearly, this fund managed to cover its distributions fully during the period. Valuation Shares of the Thornburg Income Builder Opportunities Trust are currently trading at a 10.74% discount to net asset value. This is a decent price, but it is pricier than the 11.93% discount that the shares have averaged over the past month. Conclusion In conclusion, the Thornburg Income Builder Opportunities Trust is a relatively unknown and under-followed closed-end fund that invests in both equities and fixed-income securities. The fund may have sacrificed some potential returns earlier this year, as the first half of the fiscal year ended with the fund having a lower equity allocation than normal just as global stocks started an epic rally. The portfolio is overall decent, though, especially for those investors who need to improve the diversification of their portfolios. The fund's yield is well-covered even without the use of leverage, and it is trading at a reasonable valuation.  Overall, this fund might be worth holding for the diversification alone, but the yield is also quite nice.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2461192528"}