IMO, RoC is like a yellow/orange warning light on a car’s dashboard, it may not be critical at first, but it can quietly turn red if you stop paying attention. Many investors get comfortable seeing it “always on,” and that’s when it becomes risky.
Unless you’re monitoring whether a fund is consistently earning its distribution, you could easily miss the shift from/to destructive from constructive RoC.
In NBXG’s case, the RoC currently appears constructive, since NAV total return comfortably exceeds the distribution rate. But for how long? The fund only had one bad year (2022), and yet most if not all distribution since inception has been classified as RoC. That raises fair questions like:
- How much of those early losses remain to offset?
- If they’re sitting on that many loss carryforwards, why not increase the distribution and work them off faster?
Also, I also wonder why NBXG still trades at a significant discount despite solid three-year NAV performance and activist ownership. If investors fully believed in the “constructive RoC” narrative, you’d expect that gap to narrow by now. Right?
PS: I fully understand the tax efficiency of RoC (I’ve owned MLPs that only paid RoC), but from a practical standpoint, it’s a headache. Constantly adjusting cost basis and reconciling with brokerage statements after each payout isn’t worth it to me. I prefer funds paying distributions as qualified dividends or LT cap gains, simpler to track, especially since I don’t plan to hold these funds forever.
PPS: I think, the bigger issue with RoC-paying funds is vigilance. You can’t set and forget them imo. You have to actively monitor coverage and NAV trend to ensure today’s constructive RoC doesn’t quietly morph into tomorrow’s destructive one. That's a bigger issue for me personally. |
