Q:  Would you give us a a brief overview of your company? A : RiverNorth Capital was founded in 2000 as a Registered Investment Advisor to provide investment solutions to individuals, investment professionals and institutions. Since 2004, the firm has focused on the area of quantitative and qualitative closed-end fund trading strategies. The firm launched its flagship fund called the RiverNorth Core Opportunity Fund in 2006. Today the no-load open-end mutual fund is approximately $330 million in size Q:  What is the fund’s investment objective? A : The fund’s objective is to provide investors with a balance of long-term capital appreciation and income by allocating its assets to bonds, equities and short-term instruments. By doing so, the fund offers instant diversification to multiple asset classes in a single investment. Q:  How does the fund achieve this investment objective? A : The fund typically invests in closed-end funds, exchange-traded funds, and holding and investment company stocks. The fund believes that opportunistic, discount-based investments in closed-end funds can earn excess returns over the closed-end’s benchmark index. Q:  What is the fund’s benchmark index? A : The fund’s benchmark is a blend of the S&P 500 Index and The Barclays Capital Aggregate Bond Index through a 60 to 40 ratio. Q:  How do you construct the portfolio and determine the weightings of the various holdings? A : We decide on the tactical asset allocation and weighting in the portfolio by first conducting relative value and fundamental analysis of the various asset classes available for investment while keeping in mind the economic conditions, market sentiment and market liquidity conditions. The management team assesses the risk return profiles of asset allocation alternatives by comparing the attractiveness of the various asset classes to that of other asset classes and also by comparing the valuation metrics to itself on a historical basis. This is based on the assumption that asset classes revert to their long-term historical mean valuation over time. Once the tactical asset allocation is determined we first look to opportunistically invest in closed-end funds that we believe have attractive discounts that have the potential for narrowing in addition to a thorough analysis of the fund’s fundamentals. We also invest in ETFs to fill the tactical asset allocation in order to maintain diversification across multiple asset classes and retain flexibility to respond to market dynamics. Q:  Is there any guideline to your investment? A : We stay within the range of 40% to 80% in equities and 20% to 60% in fixed income exposures. Q:  What are closed-end funds and how are they different from other funds? A : Basically a closed-ended fund is a 1940 Act registered investment company with a fixed number of shares. An investor can acquire shares in a closed-end fund by buying shares through its initial public offering or in the secondary market through the major stock exchanges exactly like the shares of any publicly traded company. The market price of a share in a closed-end fund is determined through the supply and demand for the shares trading in the market. The net asset value or the liquidation value of the closed-end fund is determined mainly by the value of the investments in the fund. Unlike an ETF, investors do not have the ability to realize the net asset value unless the fund’s board determines to liquidate. Therefore closed-end funds typically trade at a discount to their net asset value. Another distinguishing characteristic of a closed-end fund is the common use of leverage to enhance returns. These funds can raise additional capital by issuing auction rate securities, preferred shares, long-term debt and/or reverse purchase agreements. Q:  What is the rationale behind the premium or discount offered on the share price of closed-end funds? A : We believe premium and discounts primarily measure investor sentiment of retail investors. Closed-end funds are predominantly owned by retail investors. These retail investors in many cases buy and sell for irrational reasons including fear and greed. These trading dynamics of the discount provide the RiverNorth fund an opportunity to take advantage of these inefficiences. Fund sponsors of closed-end fund have little incentive to educate investors on the already issued closed-end funds since no new assets can be raised. There is also limited sell-side coverage on closed-end funds from traditional brokerage houses. Q:  What is the size of the closed-end fund market and what are some of the types of funds available? A : There are roughly around 620 closed-end funds with over $200 billion of assets under management. There are funds that invest only in municipal bonds, domestic equity funds, international equity funds, country-specific equity funds, emerging market funds, real estate funds and on the fixed income side you have mortgage-backed securities, investment grade high yield funds and merger arbitrage funds and others. In short, you have a wide choice to select from. Q:  Once you decide on the asset allocation, how do you achieve your alpha? A : When we complete our due diligence and arrive at the asset allocation needed, we then implement that asset allocation with closed-end funds and ETFs. When allocating to closed-end funds we look for catalysts that will narrow the discount spread which is a directly linked to our unique alpha source. Q:  What sort of catalysts are you looking for? A : We array these catalysts in three buckets. The first one is the statistical analysis that we do on the discounts to find out its linearity. Here we look for mean reversion characteristics because discounts typically revert to a mean. We have various models that help us determine the attractiveness of discounts from this perspective. The second catalyst we look for is corporate actions like a tender offer to buy back shares, or liquidation. In either case we will be able to generate alpha by the closed-end fund giving us the ability to achieve liquidity at or near net asset value. In the case of tender offers, since most closed-ended funds are owned by retail investors they do not participate in the tenders and our offer gets oversubscribed giving us even more alpha. The third catalyst would be shareholder activism. Even though we are not activists ourselves, there are other shareholders out there that push for a change which provides the impetus for the discount to narrow and give us the alpha. Q:  Is there any chance of your exposure to closed-end funds maxing out? A : We are typically in the 50-70% range of exposure to closed-end funds. But if fear in the marketplace is overbearing discounts can show very short-term irrational behavior. In October 2008, our exposure to closed-end fund was 98% because of the prevalent fear in the market. This led to the average discount widening to approximately 25% and in some cases greater than 40%. Q:  How many positions do you typically have in your portfolio? A : It varies from 50 to 75 positions. Q:  How do you achieve diversification? A : By its very nature a closed-end fund is a diversified vehicle. We are very diversified if you look at the underlying securities. So, if you aggregate all our equity exposures and look at the individual stocks that we own, we are always highly diversified thus eliminating company specific risk that a lot of managers are susceptible to. In addition we are diversified by asset classes due to the asset allocation decisions. Q:  What risks do you monitor and what are your risk management strategies? A : We have to mainly contend with the asset class and discount risk in this portfolio. As I said before, we are able to mitigate company specific risk with the underlying diversification in the closed-ended portion of the fund. To control the asset class risk we are typically making tactical calls in the asset classes from a risk management perspective, not speculative. We also look under the hood of the closed-end fund to check on its diversification as well as the expense ratio, among other criteria. We also have to look out at how the manager is covering the dividend especially when there is a potential for a cut in the dividend and that may lead to widening of the discounts. As I noted earlier in some cases especially when the discounts widen as volatility increases, we are able to buy in, depending on our cash position, and thus this maybe a blessing in disguise. We typically keep above average cash in our balance sheet to be able to take advantage of discount spread widening. Q:  Having a lot of cash in the balance sheet means that you are under invested, does it not? A : No. This is so because a lot of closed-end funds use leverage which enhances our beta, or market exposure with each dollar that we put to work. Thus we are able to keep more cash on the balance sheet and stay flexible from an investment standpoint. Q:  How current is the leverage information on closed-end funds? A : Closed-end funds have to disclose their positions at least on a quarterly basis and sometimes they do so, on a monthly basis also. So we know at least on a quarterly basis what the fund is doing from an investment standpoint and from a leverage standpoint.