Brookfield Real Assets Income Fund is based on a mix of credit and equity (NYSE:RA)

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(This article was co-produced with Hoya Capital Real estate)

Introduction

This is the third in a series of articles reviewing funds that seek to provide investors with returns that exceed the long-term effects of inflation, “real returns.” The first concerned SPDR SSGA Multi-Asset Real Return ETF (RLY), depending on who executes their strategy by holding other ETFs to provide exposure to assets they believe will beat inflation. The second was the Virtus Real Assets Income ETF (TRUE), which invests in a small number of basic materials, real estate and energy stocks. Here I review Brookfield Real Assets Income Fund Inc. (NYSE:RA), which uses credit assets combined with real estate and infrastructure stocks to meet its investment strategy.

Brookfield Real Assets Income Fund Review

Seeking Alpha describes this CEF as follows:

Brookfield Real Assets Income Fund is a fixed income, fixed income mutual fund launched and managed by Brookfield Investment Management Inc. The fund is co-managed by Schroder Investment Management North America Inc. It invests in the fixed income markets of the United States -United. The fund invests primarily in securities and other instruments of companies, including real estate securities, infrastructure securities and natural resource securities. Brookfield Real Assets Income Fund Inc. was established on December 2, 2016.

Source: Seekingalpha.com AR

RA has pooled assets of $934 million with a total investment exposure of $1.34 billion, as it uses a leverage ratio of approximately 30%. CEF has paid $0.199 each month since launch, which translates to a current yield of over 11%. The total fee of 2.13% includes the following:

  • Management: 141bps
  • Other expenses: 39 bps
  • Interest costs: 33 bps

RA Holdings Reviews

The latest data available is from the end of February, which makes it a bit outdated.

AR CEF

publicsecurities.brookfield.com Fact Sheet

As demonstrated by the high yield offered to investors, the asset mix is ​​geared towards generating income. While they focus on “real asset” debt, they are still subject to the current interest rate environment, which is not favorable to existing debt. These assets represent over 60% of the asset mix. I found comparison data showing how the wallet changed between 12/31/21 and 2/28/22:

Portfolio factor 12/31/21 02/28/22
Weighted average coupon 3.95% 4.09%
Weighted average maturity 4.35 4.93
Duration 2.13
Weighted FI price $98.61 $93.41
# of assets

482

473

The weighted average coupon now stands at 4.36%. In 2021, the portfolio saw a turnover of 65%, and this should continue based on the 41 basis point improvement in the WAC. The decline in the weighted average price reflects either the deterioration of existing assets or RA’s ability to add credit assets below par.

RA ticker

publicsecurities.brookfield.com Fact Sheet

As of this date, only BBB credits are rated Investment-Grade. The true default concern would be for the 9.3% rated CCC or less. Based on reviews of other FI funds, an unrated 4% level is very low. The distribution of credits has not changed much since the end of 2021.

Main holdings

Brookfield Real Assets Income Fund

Information sheet RA CAF 28/02/22

It is disappointing that the holdings data is four months old. They are expected to release quarterly holdings soon. At the end of 2021, RA was hedging its exposure to GBP and EUR, and it was on top of shorted 10-year UST notes; contracts that expired in March. Since the last sublist is dated 12/31/21, a full list of holdings from that date is available in the Annual report 2021.

AR Cast Review

Brookfield Investment Management

AR DVD from seekalpha.com

As mentioned, the payout has been $0.199 since inception. As shown in the following table, return of capital has become a major source of distributions. This coincided with the drop in net interest income.

Brookfield AR

Annual report AR CEF 2021

Currently, about 33% of recent 2022 distributions have currently (keyword) been classified as coming from ROC.

Review of RA Price and Net Asset Value

Chart
Data by Y-Charts

After selling at a discount since its inception, RA moved to a premium in early 2021 and has remained there ever since. As you would expect from a CEF whose distributions were recently provided by the ROC, the net asset value is down since its inception by 25% and 7% since 2020. The following graph shows the price / value relationship liquidation.

Brookfield Real Assets

CEFConnect.com

The recent premium is at record highs, a concern expressed by the author of the RA CEF article referenced in the Portfolio Strategy section of this article. The current premium is over 12%, which the Z-scores rate as extreme over the three time periods listed.

3 Way Fund Comparison

RLY symbol

Comparison tool jhinvesment.com

Another chart shows that all three lean towards the Core Value/Medium-Size equity universe. The P/E and P/B ratios were all close. The regional differences were there, but the United States dominates all three funds.

Symbol TRUE

Comparison tool jhinvesment.com

The number of RLY holdings is actually the largest because the 11 only represent ETFs held. TRUE tracks others and income-oriented investors would ignore this ETF.

SPDR SSgA Multi-Asset Real Return ETF

Comparison tool jhinvesment.com

Although Beta’ is close, note that RA and TRUE have very negative Alphas. RLY provides the best Sharpe and Sortino ratios. While RLY has, by far, the best upside capture ratio, it is slightly worse than the others on the downside.

Virtus Real Assets Income ETF

Comparison tool jhinvesment.com

There are sector differences among the stocks held, although no fund has significant, if any, exposure to technology stocks. RA appears to have no exposure to commodity materials and a large exposure to utilities; if the idea is to use real assets to produce “real returns”, I find that interesting. The fixed income chart apparently didn’t interpret the data well enough to present it.

Since the funds all have different start dates, I compared each separately to the Fidelity Balanced Mutual Fund (FBALX) to show sometimes that the simple still works.

RLY symbol

PortfolioVisualizer.com; compiled by author

Although the differences vary, FBALX had a higher CAGR, lower StdDev, and higher hazard ratios across all domains. As in 2022, as shown so far, there are times when these funds will outperform a standard 60/40 allocation.

Symbol TRUE

PortfolioVisualizer.com

Portfolio strategy

I mentioned my concern about the negative effect that rising interest rates could have on the credit assets held by RA. With a duration of 2.13, this equates to a price loss of 213 basis points for every 100 basis point rate increase. Experts predict that the Fed will raise rates by at least another 200 basis points. For a fund already selling above par, the price deterioration could be worse. A change in rates also affects the cost of leverage. For those interested, I recommend reading Brookfield Real Assets: A Great Yield Play But Historically High Premium, where the author has a section on this topic.

Brookfield’s Q1 commentary showed how bad credit instruments fared during this period, which was one of the worst in decades.

Brookfield Real Assets

publicsecurities.brookfield.com Q1 Report

For their equity exposure, past history shows that real asset stocks outperform during risk-free periods, as they think we are now. Note that “outperformance” primarily meant lower losses.

risk-free results

publicsecurities.brookfield.com Q1 Report

These data are accompanied by this definition:

As of March 31, 2022. These risk periods represent all corrections and bear markets defined as declines greater than 10%. Data represent peak to trough total returns for the MSCI World Index for each period.

Source: Brookfield Real Assets Report

In its 2021 annual report, the manager expressed its outlook for 2022:

We expect Federal Reserve policy to be the main driver of U.S. credit markets in 2022. At its December meeting, the Fed announced that the rate of reduction in asset purchases would be doubled to $30 billion. per month, ending purchases by March. Additionally, the Fed announced forecasts of three rate hikes in 2022, followed by three more hikes in 2023. Markets seem to be pricing in three hikes almost exactly. We think the high inflation data will start to subside after the first quarter, allowing the Fed’s normalization to be slower and more measured than expected. This would translate into continued support for risky assets (including high yield) and a steepening of the yield curve driven by real rates. If the Fed acts more quickly on rate hikes, history shows that risky assets can still do well at the start of a hike cycle. In this environment, we favor high yield and modest duration within Investment Grade.

Source: 2021 AR Annual Report; page 3

Closing Comment

Although RA is better than other real asset funds I have recently reviewed, is it a buy? In my opinion, the high exposure to interest rate sensitive assets says no. The 12% premium says it’s time to take profit.