Brookfield Real Assets Income Fund: High Yield Seems Unsustainable (NYSE: RA)

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Brookfield Real Assets Income Fund Inc. (NYSE:RA) is a fixed-income focused closed-end fund (CEF) that has consistently paid a monthly dividend of $0.199 since its inception in December 2016. So, due to a stock market crash related to the covid- 19 in 2020, the average return increased to 14%. In other years, the yield was still very high and exceeded 11 percent. Such a return, if sustainable, becomes a lucrative investment option for investors seeking income.

The bottom

Brookfield Real Assets Income Fund Inc. was established on December 2, 2016 and is co-managed by Brookfield Investment Management Inc. and Schroder Investment Management North America Inc. The primary investment objective of the fund is to seek high current income and the secondary is to generate capital growth. The fund invests in real assets, which include real estate securities, infrastructure securities and natural resource securities. RA has invested nearly 10% in each of the specialist sectors, such as utilities, cyclical, real estate and defensive sectors.

65% of the total fund is invested in fixed income securities. However, the average coupon of these securities is well below the return generated by the fund. The average coupon currently stands at 4.74%, compared to a 12-month yield (TTM) of almost 12%. The quality of fixed income securities is also poor. Over 90% of securities are rated BB or lower. In addition, more than 90% of investments have a maturity of more than 5 years.

Impact of interest rates

In recent years, the interest rate was quite low. This has helped this real asset income fund in several ways. Lower interest rates have allowed real estate and infrastructure companies to access capital at a lower rate and thus earn a higher return. Lower interest rates also helped this CEF’s yield look much better. Lower interest rates also allowed this fund to use leverage in its investment portfolio. However, as interest rates are expected to see multiple hikes in the coming years, RA will be at a disadvantage.

Low Sharpe ratio

The fund has a 5-year Sharpe ratio of 0.26, well below that of the index. The Sharpe ratio measures the average return obtained above the risk-free rate per unit of volatility or total risk. A fund’s volatility is a measure of the price fluctuations of its entire portfolio. To calculate the Sharpe ratio, the risk-free rate is first subtracted from the portfolio’s rate of return, then the result is divided by the standard deviation of the portfolio’s excess return. Thus, a lower Sharpe ratio means a lower performance of the fund.

Is the dividend sustainable?

In addition to a low average coupon of less than 5%, there has been virtually no price growth for the fund. This implies that this fund generates such a high return on its capital. Another factor to consider about this fund is that only 13% of its total holdings are held by institutional investors. In general, institutional investors have a very high stake in real assets, due to their defensive nature. Moreover, funds that generate a high yield generally attract all types of investors.

High expense ratio

Brookfield Real Assets Income Fund has an exceptionally high expense ratio of 2.13%. The main reason for such a high ratio is the percentage of fees paid to the fund advisor, which is currently 1.41%. Such high fees paid for a fixed income fund that also invests in real assets makes little sense. Moreover, this expense ratio does not appear to be decreasing significantly, as the “advisory agreement provides that the fund will pay the adviser a monthly fee for its services at an annual rate of 1% of the average daily net assets of the fund plus the amount to borrow for investment purposes.

Investment thesis

Almost since its inception, the Brookfield Real Assets Income Fund has generated an average return of between 11-14%, with a consistent monthly payout of $0.1999. Such a high return with a stable monthly income would have generally been quite lucrative for income-seeking investors. However, the fund raises various concerns regarding its performance and the future sustainability of such a high return. For starters, the fund has a very high expense ratio, which doesn’t appear to be falling in the foreseeable future due to the commitment in its advisory agreement. RA also has a fairly low sharpe ratio, implying that the average return earned on its total risk is not that high.

The Brookfield Real Assets Income Fund invests primarily in fixed income securities, the average coupon for which is well below the return generated by the fund. The quality of fixed income securities is also poor, and nearly 90% of investments have a maturity greater than 5 years. This forces the fund to stick with such poor asset quality, even though the fund sees long-term dangers. Additionally, there has been virtually no price growth for the fund. This CEF therefore seems to generate such a high return on its capital. Expected interest rate hikes also hurt this fund. In such circumstances, it is better to stay away from this CEF despite it generating a double-digit return.

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