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Neil Azous, Rareview

Rareview ETF launch focuses on closed end fund solution to yield needs


US-based registered investment adviser and ETF issuer, Rareview Capital LLC, is targeting the yield needs of investors with the launch of two ETFs designed to generate a high monthly income.  The Rareview Dynamic Fixed Income ETF (RDFI) and the Rareview Tax Advantaged Income ETF (RTAI) seek to combine the traditional benefits of fixed income with the non-traditional advantages of closed-end funds.

RDFI is an actively managed ETF that seeks to generate high monthly income by investing in closed-end funds. RDFI is a comprehensive fixed income strategy where asset-class exposure is managed dynamically and driven by market opportunities. RDFI also implements a risk overlay process intending to protect the fund in the event of a significant rise in volatility.

The Rareview Tax Advantaged Income ETF (RTAI) is also actively managed and designed to deliver high monthly income but seeks to provide a tax-free equivalent yield by investing in municipal bond closed-end funds. RTAI’s strategy may also prove attractive to US investors in high tax brackets as the ETF offers income that is exempt from federal income taxes.

Neil Azous (pictured), Founder & CIO at Rareview Capital, explains that these are the firm’s first two ETF products and build on existing strategies currently used by the investment manager.

“Above all else, we champion goals-based investment management. We believe aligning investment solutions with investor’s goals is the best approach to reaching one’s aspirations. Investing by style box or exposure to a region or asset class does not deliver the real-world outcomes people seek,” Azous says.

Rareview believes that an investor’s timeline can be broken up into four buckets: a growth phase, a preserve phase, a spend phase and then the transfer phase as the money goes to the next generation.

“We are building products along that wealth curve,” he says. “Our new ETFs are potentially suitable for the phase where you are spending your money as you need to meet your retirement income goals.”

The products have an after tax, aspirational yield target of 4 per cent. “In today’s low interest rate environment, you need to utilise non-traditional products that incorporate risk management to potentially be able to maintain your spending habits and live off the nest egg you have created,” Azous says.

And it’s a growing issue facing America. “Demographically, 10,000 people, age 65 years or older are retiring every day in the US for the next 14 years, all during a time of very low interest rates.”

The resulting 50 million people over the next decade who have saved up to USD1 million in their retirement accounts will discover that with interest rates near zero, they will no longer generate enough income to continue to live their lives comfortably, Azous says.

“This is the seminal issue of our time and our ETFs are a potential solution to addressing that issue.”

The firm has a lengthy background as specialists in fixed income and closed-end funds, so they have taken a traditional strategy of portfolio construction around a fixed income strategy and a non-traditional product of closed-end funds to use their advantages. “The outcome is we have married a traditional product with a non-traditional product,” Azous says.

In the US there are four registered investment company (RIC) types under the Investment Company Act 1940: mutual funds, ETFs, closed-end funds and unit investment trusts.

The closed-end funds universe is USD300 billion with 540 funds available, largely held by retail investors looking for income.

“It’s a niche market, it’s under researched, and has capacity constraints for larger firms who invest hundreds of billions of dollars. That said, under the appropriate steward, I believe closed-end funds are the best potential solution to many of the income problems that exist today,” Azous says.

Closed end funds offer yield because they are typically fully invested, having completed a traditional public offering to raise a pool of capital, usually in the USD100’s of millions, for instance, the stock starts to trade and the portfolio is always 100 per cent invested with no cash balance.

“The portfolio manager doesn’t have to worry about a redemption because of market conditions, and he or she can use a moderate amount of leverage to acquire assets,” Azous explains.

This could be 1.25 per cent of the underlying basket on average – an extra 0.25 times the underlying which gives additional yield but also increases the risk of volatility.

“We are an active manager so we can buy the cheapest securities and utilise our expertise to potentially protect the fund from a significant rise in volatility or widening credit spreads,” Azous says. “Risk-adjusted yield is where we come in as specialists in closed-end funds with a pedigree that potentially allows us to help reduce drawdowns or mitigate risk.”

The final source of total return through closed-end funds is that many trade at a discount to NAV, with the stock price lower than the underlying value of the basket combined. This gives extra yield as the investor buys at 90 cents on the dollar, at a ‘bargain’ price, for a portfolio that might go to 100 cents, Azous explains.

The three routes to making money from a closed-end equity fund tend to be most optimal when volatility is within the normal range, and a bull market is performing well with a positive trajectory.

However, Rareview is focused primarily on fixed income closed-end funds, which, they say, are less dependent on stock market beta. “Of the total return potentially, the majority typically comes from high distribution. The balance comes from potential principal NAV appreciation and from capturing the change in NAV as the fund’s discount-to-NAV narrows.”

The ETFs are available to registered investment advisers, the retail public and institutions and the firm also offers its strategies via third-party asset management platforms (TAMP).

The plan is to bring out other products, focused on delivering various model portfolios across the wealth curve, some traditional and some based on global macro investing and a more active approach.

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