While most income funds are tethered largely to the bond market, Thrivent Multidimensional Income Fund (TMLDX) draws from a wide range of income-oriented investments in search of greater diversity and potentially better returns.
“Roughly 55% of the portfolio is exposed to what we call ‘the alternatives,’ which would include preferred securities, convertible bonds, closed-end funds, and some opportunistic equities that have higher dividend yields or some fixed income-type characteristics,” explains Grant Whitehorn, CFA, Fund Portfolio Manager.
In addition to its alternative investments, the Fund also shoots for higher yields by allocating about 34% of its assets to high yielding corporate bonds.
With a greater weighting of equity-like holdings, capital appreciation plays a greater role in the Fund’s total return than it would with traditional income funds. “For instance, convertible bonds have some bond characteristics, as well as conversion features to participate in the equity upside,” explains Whitehorn. “So that does create the potential for some additional capital gains in the Fund.”
While the broader range of investment components in the Fund offers greater potential for higher returns, it also introduces some additional areas of volatility and risk. “We’re not as sensitive to interest rate swings as traditional fixed-income funds, but we have more equity-like risk, so we still experience some volatility in terms of both price movement and dividend uncertainty,” explained Whitehorn. “But there is a trade-off because we’re getting compensated with some additional income and yield potential.”
The closed-end fund portion of the portfolio also adds some liquidity risk, said Whitehorn, “but we try to balance that out by also owning some fixed income ETFs, which demonstrated good liquidity during the recent crisis. We also limit our overall exposure to the riskier sectors.”
Interest rate swings
Whitehorn believes the diversification of the portfolio may put the Fund in a better position to weather a rise in rates than most other income funds.
“One of the key differences between traditional fixed income funds and Thrivent Multidimensional Income Fund is that because of our equity-like holdings, our portfolio is less sensitive to interest rate swings,” said Whitehorn.
The multidimensional make-up of the Fund may help buffer the effects of economic forces such as interest rates, taxes and inflation, while providing more opportunity for total return in a strong equity market than traditional fixed-income funds.
For more on the Fund, see Thrivent Multidimensional Income Fund.