1Q 2024 Solving for Income with the Income Builder Opportunities Trust

1Q 2024 Solving for Income with the Income Builder Opportunities Trust

Michael Corrao:

Thank you for joining us for the Thornburg Income Builder Opportunities Trust first quarter 2024 update. I’m Michael Corrao, director of global communications at Thornburg with me is Adam Sparkman, client portfolio manager of the closed end fund. Adam, it’s great to see you.

Adam Sparkman:

You too, Michael. Thanks for having me today.

Michael Corrao:

Before we dive into the Thornburg Income Builder Opportunities Trust, which will abbreviate by its ticker, TBLD, I think a logical place to start is with a market and the closing fund backdrop.

Adam Sparkman:

I’ll start with equities, you know, really, we saw a continuation of that late 2023 rally within the S&P 500^®. It was up more than 10% for the second quarter in a row. And despite the similar results quarter over quarter, I do think that we saw a shift and some of the underlying economic drivers that have really been carrying that equity rally. For instance, if you look at the last three months of 2023, stocks moved higher really around falling inflation and the anticipation of a sooner than expected rate cut environment. We saw that the market went from forecasting three rate cuts of roughly 75 basis points for 2024. Back in October to pricing seven rate cuts of 175 basis points by the end of December.

Closing funds are obviously very sensitive to the rate cycle. And the rapid pace of Fed hiking has been a tough environment really for the last two years for closed ends. So that shift in sentiment during the fourth quarter, led to some narrowing of discounts across the close in space.

During the first quarter of this year. We’ve actually seen the Fed now temper rate cut expectations as inflation is starting to feel more stubbornly range bound. CPI is currently sitting at 3.8%. And when you couple that with the strong jobs data that we got during the first quarter, as well as an unemployment rate of less than 4%, it’s again feeling like it could take a bit more time to see some rate easing really work its way through the system with a soft or no landing now very much the base case for markets, equities have continued to rise, credit spreads have gotten even more narrow. And we’re now once again back in a place where markets are forecasting about three rate cuts for 75 basis points during 2024.

With the shift and rate expectations during the quarter bond yields rose particularly on the back end of the curve. We saw the yield on the 10-year Treasury move from 3.88% to roughly 4.2%. So it’s been a bit of a push and pull from a sentiment perspective for closing funds. A soft landing scenario is obviously good for risk assets, but that higher for longer rate risk is a headwind for much of the closing segment. Overall though discounts have been broadly narrowing since last fall across closed ends. And I still think that there’s a lot of opportunity for investors looking to take advantage of price dislocations within the closed in asset class.

Michael Corrao:

Let’s shift now to TBLD’s performance. How was the quarter?

Adam Sparkman:

I think it’s constructive to always consider the Fund’s performance both in terms of the current market price, as well as versus the actual nav on a price basis, the portfolio returned roughly 6.1% during the quarter.  That was slightly less than the 6.4% return of our benchmark, which is a blend of the MSCI World Index and the Bloomberg us AG. On a nav basis, the portfolio return 3.4%, so performance really was bolstered by a narrowing of our discount during the period. If you dig into relative performance versus that blended index or underweight positioning to equities, it was roughly 57% versus 75% for the blended index. It was a headwind during a period where global stocks returned nearly 9% and bonds were in slightly negative territory.

The portfolio’s bias to more value in income-oriented segments of the equity universe was also a bit of a challenge. During the period global growth stocks led their value counterparts by roughly 250 basis points. We were overweight fixed income as I mentioned, that detracted from relative performance. But our bond exposure did outperform the fixed income portion of our index, with really our shorter duration positioning and security selection within corporates driving that outperformance. The portfolio’s call writing activity also contributed positively to performance during the quarter.

Michael Corrao:

An important consideration for closing fund investors is the discount to NAV and dividend distributions. Adam How does TBL D measure up?

Adam Sparkman:

So currently, the discount is 12%. That’s been a steady improvement since last fall. But we recognize that there’s definitely still a ways to go there while the current discount is generally in line with many of our multi asset peers. We do hope that by engaging in client communication like this, we can really help guide current and prospective shareholders and hopefully continue to see that discount narrow. One thing that we can control is that distribution. We’ve announced another distribution of a little bit more than 10 cents a share. Since inception, TBLD has paid 32 distributions at that same 10.4 cents for a total of $3.33 per share.

When we declared that initial distribution in August of 2021, it was at an annual distribution rate of 6.25% on the IPO price. But for an investor buying it today, that same 10.4 cents represents a yield on market price of 7.7%, which again, we think that’s a really attractive proposition for would be long term shareholders of this fund.

Michael Corrao:

Adam, let’s turn to TBLDs current positioning.

Adam Sparkman:

From a positioning perspective, we have roughly 60% of exposure in equities right now with the other 40% in fixed income as well as cash equivalents. That hasn’t been a major change, at least from a top-level allocation perspective over recent quarters. But we have adjusted the equity weighting down a bit over the past couple years.

When we launched the fund in July 2021. It was a really challenging environment to find compelling yield opportunities and fixed income, interest rates and credit spreads were both at historic lows. And we really had to lean heavily into our credit expertise, and focus on credit stories and really high exposure to floating rate like product. Over the past two years, rates have risen from essentially 0% to 5%. Today, so we have a very different menu within fixed income relative to when we initially funded this portfolio. And we continue to increase the quality of the portfolio, we’re taking less credit risk today. And we’re also looking to opportunistically add a bit of duration when we get periods of volatility. We think that makes a lot of sense, given the current landscape.

We’ve also been able to scale back the options overlay a bit, given the ability to generate attractive yield more organically, as I mentioned, within fixed income. It’s been as high as 25%, back in 2022, but it’s closer to 10% today. And that allows us to keep a little bit more of that upside within the equity book.

Michael Corrao:

Let’s zoom in. Where else are you seeing opportunities in the current market?

Adam Sparkman:

So one area we continue to see attractive opportunities is across international equity markets, especially in parts of Europe. Part of the reason for that is that international markets tend to have much higher dividend yields than US stocks, even for companies that are very comparable, and are operating in very similar environments and have very similar growth rates.

The other part of that, though, is that international assets, much like the closed in market are trading at significant discounts today. And we’ve taken advantage of that discount by continuing to hold international stocks and looking to increase our exposure to some of those assets.

Where we sit today, the S&P is hitting all-time highs. The top 10 stocks in the S&P are more than 33% of the total index weight, of that close to 30% of that as the Magnificent Seven. And if you go back all the way to 1964, the current level of concentration is close to the very top decile versus history. The P. E. spread of the 10 largest stocks versus the rest of the S&P 500 is also wide and close to that top decile as well. So valuation seems stretched across segments of the US also with a lot of that concentration risk. But if you again, look at a market like Europe, it’s trading at something like 13 times forward earnings versus 20 times for the S&P 500. Today, that’s about a 30% discount, whereas the long-term PE discount has been more like 15 to 20%. We’re obviously bottom-up investors, we’re not making a broad macro call on Europe. But we are finding a lot of really attractive opportunities across the continent, as well as other international markets.

Michael Corrao:

That’s Adam Sparkman a client portfolio manager at Thornburg. Thank you for joining us for the Thornburg Income Builder Opportunities Trust first quarter 2024 update.