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Matisse Capital: The Closed-End Fund Specialists Tackling Retirement Income Gaps

From left to right: Nik Torkelson (VP of Finance & Marketing);  Bryn Torkelson (Founder, CIO); Eric Boughton, CFA (Portfolio Manager and Chief Analyst) From left to right: Nik Torkelson (VP of Finance & Marketing); Bryn Torkelson (Founder, CIO); Eric Boughton, CFA (Portfolio Manager and Chief Analyst)

Brand Story - At a time of historically low interest rates, this investment advisory firm believes it can leverage fintech & closed-end funds to target 6-7% in annual income.

Roughly 10,000 people retire daily in the United States. Set against the backdrop of our current low interest rate environment, it appears the need for a competitive fixed income strategy has never been stronger.

But when we examine the yields on common investment options lately (view table), we see that most of them start with a “1”.

“The reality is, Americans are retiring and need to replace their income to meet their expenses during retirement,” says Bryn Torkelson, Founder and CIO of Matisse Capital. “We believe that we can tap into our knowledge of closed-end funds to help retirees meet their income needs. A portfolio built today could yield six to seven percent in income. That number can change over time, but that’s what we’re seeing right now.”

An SEC-registered investment advisor headquartered in Lake Oswego, Matisse Capital manages approximately $1.25 billion in client assets (as of 12/31/2019). Its client base consists of high-net-worth individuals, foundations & endowments, retirement plans, and institutions primarily on the West Coast.

The firm specializes in mutual fund research, asset allocation strategy and building mutual fund portfolios for its clients. Matisse has been considered a leading closed-end fund research and portfolio management firm, serving as advisor to the Matisse Discounted Closed-End Fund Strategy Institutional mutual fund (MDCEX).


Yields as of 3/19/2020
1.2% – 10-Year US Treasuries
1.8% – 30-Year US Treasuries
1.1% – 3-Month LIBOR
1.1% – 5-Year CD Average (bankrate.com)
0.6% – Savings Account Average (bankrate.com)
1.4% – Vanguard Prime Money Market
1.8% – TIPS
4.0% – Investment-Grade Corporate Bonds
Source: Bloomberg (except where noted)


Closed-End Funds: A Potential Ticket for Baby Boomers Who Need Income
Closed-end funds are a type of mutual fund that may offer higher average yields than category peers (such as open-end funds and ETFs) and can help investors struggling to find income. These vehicles trade on stock exchanges, so their prices are moved by supply and demand but not directly by the performance of their underlying portfolios. As a result, shares of a closed-end fund may trade at a price that is above (at a premium) or below (at a discount) its net asset value.

For example, if a fund trades at a 10-percent discount, its underlying assets may be worth $100, but you can purchase them for $90. This not only provides added exposure to the underlying assets, but it also enhances the effective income yield for each dollar invested.

In 2008, Matisse compiled month-end prices, net asset values, all distribution history and any capital change information for every closed-end fund in existence at the time (about 600 funds), dating back to each fund’s inception date.

“Our primary data source, Bloomberg, had reliable information on closed-end funds going back to 1988,” explains Eric Boughton, CFA, Portfolio Manager & Chief Analyst, Matisse Capital. “This is where we began our database. We then painstakingly calculated a month-by-month total return for each fund, along with each fund’s month-end premium or discount.”

Flash-forward to today: Matisse now maintains, to its knowledge, the longest known proprietary research database on closed-end fund discounts.

IT4A6135The Matisse investment team closely tracks closed-end fund prices and net asset values in real-time throughout the trading day.

“Technological advancements have allowed us to slice and study the closed-end fund universe in a myriad of different ways,” says Nik Torkelson, VP of Finance & Marketing, Matisse Capital. “All of our studies indicate the single greatest predictor of a closed-end fund’s future return is its discount to net asset value. We believe almost nothing else matters in a statistically significant way.”

Armed with an extensive database on closed-end funds, Matisse engineered a quantitative model that has driven their investment decisions for more than a decade.

“We believe that our model has the ability to predict, to a reasonable approximation, how quickly, by how much, and in which direction a closed-end fund’s discount or premium to net asset value will move in the future,” Boughton explains.

Introducing the Matisse Discounted Bond CEF Strategy
Based on demand, Matisse is now offering its fixed income closed-end fund strategy to clients and qualified outside investors through separately managed accounts. As veterans in the field, Matisse will build and manage diversified portfolios of fixed income closed-end funds – with exposure to various fixed income categories across the market spectrum.

The investment team targets closed-end funds that they believe are best positioned to experience discount narrowing (as indicated by their model). Matisse believes that these investments can allow their investors to profit from (1) the income generated from closed-end fund distributions and (2) the capital appreciation achieved when such discounts narrow.

While Matisse’s proprietary model primarily focuses on the relationship between price and net asset value, the entire investment process also incorporates quantitative information about dividends, management, expenses, portfolio, liquidity and historical pricing. Similarly, an analysis based on the same process determines when a closed-end fund should be sold.

“We view this as an alternative, and not a complete substitute, for bond investors,” Torkelson notes. “This strategy will be more volatile than bonds, which some investors might not like. But at the end of the day, retirees need income, and we think we can tap into our expertise to provide a potential solution.”

Matisse was hired by a large public institution in November 2019 to run this strategy as a sleeve within a $3.9 billion open-end mutual fund. But they are officially making the strategy available to clients and qualified outside investors this year.

The Matisse Discounted Bond CEF Strategy is now available. Those interested can call Matisse directly or visit the firm’s website — https://www.matissecap.com/closed-end-funds — to learn more.

An investor should consider the investment objectives, risks, and charges and expenses of the Fund carefully before investing. The prospectus contains this and other information about the Fund. A copy of the prospectus is available online at www.ncfunds.com or by calling Shareholder Services at 1-800-773-3863. The prospectus should be read carefully before investing.

Past performance is not necessarily indicative of future results, and there can be no assurance that the results will be achieved. The views and opinions expressed are for informational and educational purposes only, and do not constitute any investment advice or recommendation by Matisse Capital.

Important Disclosures
Closed-end funds involve investment risks different from those associated with other investment companies. When shares of a closed-end fund are purchased at a discount to its net asset value, there can be no assurance that the discount will decrease, and it is possible that the discount may increase and affect whether the investor will realize a gain or loss on the investment. Many closed-end funds use leverage, or borrowed money, to try to increase returns, which entails greater risk and can lead to a more volatile share price. If a closed-end fund uses leverage, increases and decreases in the value of its share price will be magnified. The closed-end fund will also have to pay interest or dividends on its leverage, reducing the closed-end fund’s return.

Many closed-end funds have a policy of distributing a fixed percentage of net assets regardless of the fund’s actual interest income and capital gains. Consequently, distributions by a closed-end fund may include a return of capital, which would reduce the fund’s net asset value and its earnings capacity. Finally, closed-end funds can invest in a greater amount of illiquid securities than open-end mutual funds. Investments in illiquid securities pose risks related to uncertainty in valuations, volatile market prices, and limitations on resale that may have an adverse effect on the ability of the fund to dispose of the securities promptly or at reasonable prices.

 


Brand stories are paid content articles that allow Oregon Business advertisers to share news about their organizations and engage with readers on business and public policy issues.  The stories are produced in house by the Oregon Business marketing department. For more information, contact associate publisher Courtney Kutzman.

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