JRI - JRI: High-Yielding Relatively Riskier Fund Suitable For The Current Conditions

2023-07-20 17:35:42 ET

Summary

• Nuveen Real Asset Income and Growth Fund generates high levels of yield through a mix of high-coupon bonds and stocks of firms engaged in the business of energy & utilities infrastructure.
• JRI pays steady monthly dividends along with a double-digit annual average yield over the long run. However, it fails to generate positive price growth.
• High inflation, rising interest rates, and a looming economic recession will probably send this fund relatively lower than traditional funds or high growth stocks.
• JRI has a high expense ratio as well as high turnover ratio, primarily due to high levels of diversification, active management, and a high degree of leverage.
• JRI’s bond portfolio mostly consists of non-investment-grade bonds, having a credit rating of BBB or lower, which by nature are risky and have default risks.

~ by Snehasish Chaudhuri, MBA (Finance).

During my last coverage more than a year ago, I found Nuveen Real Asset Income and Growth Fund (JRI) was paying steady monthly dividends along with high yields. That high yield was supported by an average coupon of 5.5 percent, and returns of equity holdings in energy & utilities' infrastructure companies. It is a closed-end balanced mutual fund, or CEF, that invests in stocks of firms that are operating in the real estate sector, and in non-investment grade debt securities that are mostly rated BBB or lower. Although it is a global fund, more than 70 percent of its $372 million assets under management, or AUM, is invested in the markets of the United States and Canada. The fund has a weighted average price-to-earnings ratio, or P/E, of 14.6, and is currently trading at a deep discount .

JRI Invests Primarily In Equities Of Energy & Utility Infrastructure, And In REITs

Nuveen Real Asset Income and Growth Fund was formed on April 25, 2012, by Nuveen Investments, Inc., and is currently co-managed by Nuveen Fund Advisors LLC and Nuveen Asset Management, LLC. More than 40 percent of JRI's investments are made on pipelines and utilities. Its top investments in energy infrastructure stocks were Enbridge Inc. (ENB), Enterprise Products Partners L.P. (EPD), The Williams Companies, Inc. (WMB), ONEOK, Inc. (OKE), Kinder Morgan, Inc. (KMI) and Pembina Pipeline Corporation (PBA). Equity stocks of companies engaged in the business of transmission of electricity & gas such as National Grid plc ADR (NGGTF), Enel SpA (ENLAY), Snam S.p.A. (SNMRY) and SSE plc (SSEZY) also feature among JRI's top 20 investments. Barring ENB and PBA, all other stocks registered positive price growth over the past one year, at a time when most stocks failed to generate positive returns.

Significant allocation has also been made on companies engaged in healthcare, technology, industrial and retail infrastructure. JRI's top investments also include a number of real estate investment trusts from diversified segments, such as gaming & hospitality REITs - VICI Properties Inc. (VICI) and Gaming and Leisure Properties, Inc. (GLPI); industrial REITs - LXP Industrial Trust (LXP) and Mapletree Logistics Trust (MAPGF); communication tower infrastructure REIT - Crown Castle Inc (CCI), residential REIT - Apartment Income REIT Corp. (AIRC), healthcare REIT - Healthpeak Properties, Inc. (PEAK), retail REITs - Link Real Estate Investment Trust (LKREF) and NNN REIT, Inc. (NNN) and data center REIT - Mapletree Industrial Trust (MAPIF). Over the past one year, not a single stock registered positive price growth.

JRI Has Been Consistently Generating High Yield Along With Monthly Payout

From the very nature of these industries, we can realize that the value of this fund will move at a very slow and steady rate. However, during economic uncertainty, these are the only stocks which generally perform better than the growth or value stocks. High inflation, rising interest rates, and a looming economic recession impacts these stocks much less than traditional or high growth stocks. The fund didn't disappoint in this regard, as it was able to generate an annual average total return of almost 12.1 percent in between 2016 and 2021. Last year was extremely poor for this fund, as was the case with almost every other fund. In 2023, so far, JRI's return is almost 5 percent. Where this fund excels is in yield . Since 2013, annual yield has ranged between 7 and 17 percent. Annual average yield stood high at 10.3 percent. Moreover, the fund paid a consistent monthly dividend over the entire period.

JRI Possess Risks Due To High Expense Ratio, Leverage, And Quality of Bond

The Fund seeks to deliver a high level of current income and long-term capital appreciation by investing in real asset-related companies across the world and also in below-investment-grade debt securities. But in order to create such a diverse, global, active portfolio, the fund incurs a high level of expenses which is represented by its high expense ratio of 2.63 percent. Another reason behind the high expense ratio is the interest expense on the loans. The leverage component of this fund is almost 30 percent. Another risk factor of Nuveen Real Asset Income and Growth Fund is its bond portfolio. Its bond portfolio is quite risky, as most of those have a credit rating of BBB or lower.

In a recessionary situation, there lies a chance of such bonds defaulting in either principal or interest payment. Even if those bonds default in their interest payments, it will highly impact its dividend, which is the most lucrative part of this fund. Historically, Nuveen Real Asset Income and Growth Fund failed to generate consistent positive price growth throughout its existence. Similar to last coverage, I expect JRI to trade within the same range, as there are hardly any fundamental changes within its portfolio. Thus, reduction in the monthly pay-out probably may imply that the fund has nothing much to offer.

Investment Thesis

Nuveen Real Asset Income and Growth Fund aims to generate a high level of current income through a mix of investments in high-yielding bonds and equities of companies engaged in the business of energy and utilities infrastructure. The fund also invests significantly in various types of REITs. JRI pays steady monthly dividends along with a double digit annual average yield over the long run. That high yield is well-supported by an average coupon of 5.5 percent on its bond portfolio. By the very nature of JRI's portfolio, we can say that high inflation, rising interest rates, and a looming economic recession will impact this fund relatively lower than most of traditional funds or high growth stocks. During the past 12 months, when most stocks and funds failed to generate positive price growth, 8 out of its top 10 equity investments in energy and utilities infrastructure companies recorded positive price growth.

Nuveen Real Asset Income and Growth Fund is also trading at a deep discount of almost 15 percent, which makes it highly lucrative. However, JRI has a high expense ratio resulting from its high level of diversification and high leverage component. Also, its bond portfolio mostly consists of non-investment grade securities, mostly having a credit rating of BBB or lower, which by their very nature are riskier than investment grade bonds. In a recessionary environment, these bonds have a greater probability of defaulting on either in their principal or in interest payments. Defaults would lead to reduction in payoff, which is perhaps the only lucrative part of this fund.

Throughout its existence, Nuveen Real Asset Income and Growth Fund has failed to generate consistent positive price growth. Thus, in the absence of high yield, this fund will have no attractiveness. Thus, I would suggest JRI's existing investors to hold on to their investments in JRI and not to buy additional units.

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