RA: Reiterate Avoid Recommendation

seekingalpha04-06

The Brookfield Real Assets Income Fund invests in corporate credit and real assets to generate high income.Despite a strong risk rally, the RA fund has barely kept pace with its distribution yield.On ...

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}\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nRA: Reiterate Avoid Recommendation\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-04-06 13:30 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4682454-ra-reiterate-avoid-recommendation><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>The Brookfield Real Assets Income Fund invests in corporate credit and real assets to generate high income.Despite a strong risk rally, the RA fund has barely kept pace with its distribution yield.On ...</p>\n\n<a href=\"https://seekingalpha.com/article/4682454-ra-reiterate-avoid-recommendation\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"BK4504","symbol_name":"桥水持仓","start_time":0,"source_url":"https://seekingalpha.com/article/4682454-ra-reiterate-avoid-recommendation","article_id":"2425918522","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/684123206/image_684123206.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2425918522","pubTimestamp":1712381447,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"The Brookfield Real Assets Income Fund invests in corporate credit and real assets to generate high income.Despite a strong risk rally, the RA fund has barely kept pace with its distribution yield.On ","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"BK4504":"桥水持仓","IYR":"房地产指数ETF-iShares道琼斯","CMBS":"Ishares Barclays Cmbs Bond Fund","RA":"Brookfield Real Assets Income Fund Inc.","HYG":"债券指数ETF-iShares iBoxx高收益公司债","MBB":"美国按揭抵押债券ETF-iShares","FDN":"First Trust Dow Jones Internet I","BK4585":"ETF&股票定投概念","BK4561":"索罗斯持仓","BK4581":"高盛持仓","BK4588":"碎股","BK4550":"红杉资本持仓","LQD":"债券指数ETF-iShares iBoxx投资级公司债"},"translate_title":"RA：重申避免建议","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"RA":1,"CMBS":1,"MBB":1,"HYG":1,"IYR":1,"LQD":1,"US3Y.BOND":0.9,"US30Y.BOND":0.9,"US2Y.BOND":0.9,"US12M.BOND":0.9,"US10Y.BOND":0.9,"FDN":0.9,"US5Y.BOND":0.9,"US6M.BOND":0.9,"US7Y.BOND":0.9,"US912797GK78.BOND":0.6,"US912797HH31.BOND":0.6,"US912797GB79.BOND":0.6,"US912797GL51.BOND":0.6,"US912797GW17.BOND":0.6,"US912797HE00.BOND":0.6,"US912797HG57.BOND":0.6,"US912797FS14.BOND":0.6,"US912797FH58.BOND":0.6,"US912796CX52.BOND":0.6},"content_text":"The Brookfield Real Assets Income Fund invests in corporate credit and real assets to generate high income.Despite a strong risk rally, the RA fund has barely kept pace with its distribution yield.On a normalized basis, I do not believe the RA fund's distribution is sustainable given it is paying ~10% of NAV, while long-term performance has been 4-5%.   PM Images Back in August, I wrote a cautious article on the Brookfield Real Assets Income Fund (NYSE:RA), warning that despite a steep 41% cut to the fund's distribution, the RA fund's new distribution rate may still be unsustainable, as the fund was implying a ~10% of NAV distribution yield compared to 3 and 5 year historical returns of only 4.3% and 2.4% respectively. Since my article, the RA fund has returned 0% to investors (Figure 1).   Figure 1 - RA fund has delivered 0% market returns (Seeking Alpha) However, actual market performance was not quite as bad as the headlines suggest. Combined with the fund's $0.118 / month distribution, RA investors actually received total returns of 7.4% since August 31st, 2023, a respectable figure for an income fund (Figure 2). Figure 2 - RA total return since August 31, 2023 (Seeking Alpha) Given RA's mandate is to provide investors with high current income, it seems the RA fund met its mandate and was able to deliver a respectable 7.4% total return in 7 months. Does this mean my cautious stance was unwarranted? RA Outperforming Its Underlying Assets While RA's returns since August have been fairly strong, there are two points I want to highlight for readers' consideration. First, on the positive side, if we look at the composition of RA's portfolio, we know that the fund holds 60% of its portfolio in corporate credit (~28% investment grade and 72% non-investment grade), 35% in securitized credit (RMBS and CMBS), and 5% in real estate and infrastructure equities (Figure 3). Figure 3 - RA fund portfolio allocation (RA fact sheet) Comparing RA to passive ETFs representing the underlying asset classes like the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD), the iShares iBoxx $ High Yield Corporate Bond ETF (HYG), iShares CMBS ETF (CMBS), iShares MBS ETF (MBB), and the iShares U.S. Real Estate ETF (IYR), we can see that RA actually outperformed its underlying asset classes since late August (Figure 4). Figure 4 - RA has outperformed underlying assets (Seeking Alpha) However, on the negative side, the 7.3% return mentioned above is based on the RA fund's market prices. On a NAV basis, total returns since August 31st, 2023 was only 6.6% (Figure 5). This was barely able to cover its distributions, since the fund's current NAV of $14.76 is barely higher than the August 31st NAV of $17.70. Figure 5 - RA fund earned 6.6% in NAV returns since August 31, 2023 (morningstar.com) So despite 'shooting the lights out' and outperforming its underlying assets, the RA fund was barely able to fund its distribution. Therein lies my main issue with the RA fund. Is The Distribution Sustainable? Even with the tremendous risk asset rally we have had since the Federal Reserve pivot in Q4/23, the RA fund is barely earning total returns that fund its $0.118 / month distribution (11% forward yield on market price and 9.6% forward yield on NAV). What happens in a normalized return environment? I believe in a normalized return environment, the RA fund may have to liquidate NAV in order to fund its over-generous distribution, as the underlying assets simply cannot sustain a 10% of NAV distribution. As I have written before, investors need to be realistic on what different asset classes can earn over a cycle. Since inception, the RA fund has delivered average annual returns of 4.5% p.a., and I see no reason to believe it will materially earn total returns much higher than that rate over the long-run (Figure 6). Figure 6 - RA fund historical returns (morningstar.com) Funds that do not earn their distribution yields over the long-run are called 'return of principal' funds and are characterized by long-term amortizing NAV, just like the RA fund (Figure 7). Figure 7 - RA fund has distinctive amortizing NAV pattern (morningstar.com) The problem with 'return of principal' funds is that long-term investors may end up losing both principal (as market price tends to track NAV) and income (as distributions are eventually reduced). RA Continues To Trade At A Steep Discount Investor support, once lost, is extremely difficult to regain. Just ask the Brookfield. The RA fund traded at a large premium to its NAV for almost 2 years as the fund was paying a very attractive $0.199 / share distribution. However, that premium was lost last August when the fund cut its distribution to $0.118 / month. Since then, the RA fund has been trading at a 10-15% discount to its NAV (Figure 8). Figure 8 - RA trades at a steep discount (cefconnect.com) To close this steep discount, one possible course of action for the fund manager may be to institute a tender offer to allow long-suffering investors a chance to exit the fund at close to NAV. However, to date, there is no indication that Brookfield would implement any changes that could improve this discount to NAV. Conclusion I believe my prior conclusion on the Brookfield Real Assets Income Fund still stands. While the fund has performed well since August, it has only kept pace with its ~10% distribution yield. I do not believe this distribution is sustainable in the long-run as the underlying asset classes simply do not generate that level of returns.  I personally recommend investors steer clear of amortizing 'return of principal' funds like the RA fund.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.25.1","shortVersion":"4.25.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2425918522"}