NMAI - NMAI: Deep Discount To NAV But Poor Performance

Summary

• NMAI is a closed-end fund designed to provide current income and capital appreciation.
• It was reorganized from 3 Nuveen funds, JDD, JTA, JTD.
• Investment performance since inception has been very poor, with NAV declining 38%.
• I would avoid this fund.

The Nuveen Multi-Asset Income Fund ( NMAI ) pays an attractive 13.0% current distribution yield. However, its investment performance since inception on November 22, 2021 has been poor, with a -38% decline in NAV. Investors have lost confidence, as evidenced by the deep discount to NAV. I would recommend investors avoid this fund.

Fund Overview

The Nuveen Multi-Asset Income Fund is a closed-end fund ("CEF") that aims to provide attractive total returns through high current income and capital appreciation. The fund has approximately $450 million in assets.

Strategy

The NMAI fund is effectively an unconstrained hedge fund wrapped in a CEF vehicle that pays a high current yield to attract investors. In the fund's own words: (highlight by the author)

The Fund dynamically invests in a portfolio of equity and debt securities of issuers located around the world. This dynamic investment strategy uses a risk-based framework in which any amount can be allocated to an asset-class at any time . The Fund may invest in equity and debt securities of any type without limit . The relative allocations of the Fund’s managed assets for investment between equity and debt securities, and relative allocations to the different types of equity and income strategies, will vary from time to time, consistent with the Fund’s investment objective. The Fund uses leverage.

The NMAI was formed from the reorganization and amalgamation of 3 separate CEFs: the Nuveen Diversified Dividend and Income Fund ("JDD"), the Nuveen Tax-Advantaged Total Return Strategy Fund ("JTA"), and the Nuveen Tax-Advantaged Dividend Growth Fund ("JTD").

Portfolio Holdings

The NMAI fund’s holdings as of September 30, 2022 are shown in Figure 1. Currently, the fund is 51% invested in common stocks, 13% in senior loans, 13% in preferred securities, 12% in asset-backed securities, and 13% in corporate bonds and other investments.

Figure 2 shows the credit quality of the fund's bonds portfolio. It is predominantly invested in non-investment grade bonds (over 70% below BBB).

As mentioned in the strategy section, the fund's asset allocation can move around quite a bit depending on management's views. As of June 30, 2022, the fund had 61% invested in common stocks and 17% in REITs, so the common stock portfolio had been reduced very significantly in a short period of time (Figure 3).

The NMAI fund also employs leverage. As of September 30, 2022, the fund had effective leverage of 37% (Figure 4).

Returns

The NMAI fund was only established in November of 2021, so it does not have a long track record. However, so far, performance has been very poor. Since inception, it has annualized returns of -27.2% on NAV. YTD, the figure is -28.5%.

With an inception NAV of $20.00, the NAV has dropped to $12.43 as of October 20, or a decline of 37.9%.

Distribution & Yield

One of the main selling points of the NMAI fund is its high current income. It pays a quarterly $0.35 / unit distribution, which works out to a current yield of 13.0% or 11.3% of NAV.

Interestingly, the fund recently announced a long-term capital gain distribution of $0.8347 / unit to be paid on November 1, 2022. It is my understanding that long-term capital gains require a holding period longer than 1 year. Given the fund was incepted on November 22, 2021, these must be long-term capital gains from the reorganized funds as described above. Paying out $0.8347 will further reduce the NAV and make the $0.35 quarterly distribution harder to maintain.

Looking at the fund's 19a report, we see the NAMI fund has allocated 63% of YTD distributions of $1.05 to LT gains (Figure 7). This means the fund only has Net Investment Income (“NII”) coverage of 37%, low for an ‘income’ fund.

Given the poor investment performance mentioned above, it is hard to see how the current distribution rate (11.3% of NAV) is sustainable. Once LT gains are exhausted, the fund will likely pay distributions through Return of Capital (“ROC”) that will further shrink the NAV. The lower the NAV gets, the less assets there are to generate income to pay the distribution; this becomes a vicious cycle that I think can only lead to a distribution cut sometime in the future.

Fees

The NMAI fund charges a moderately high 1.25% management fee and 2.09% expense ratio.

How Can Returns Be This Bad?

Perhaps it was bad luck, but the NMAI fund was incepted on November 22, 2021, basically at the peak of the current market cycle. Since November 22, 2021, most asset classes, as measured by the SPDR S&P 500 ETF Trust ( SPY ), the iShares 20+ Year Treasury Bond ETF ( TLT ), the iShares iBoxx $ Investment Grade Corporate Bond ETF ( LQD ) and the iShares iBoxx $ High Yield Corporate Bond ETF ( HYG ) have experienced deep drawdowns ranging from -13% to -35% respectively to October 20 (Figure 9).

What is impressive with NMAI's return is that it's -37.9% NAV decline to October 20, 2022 has exceeded even the worst asset class, TLT. On a market price basis, it's -45.1% return is even worse.

My only hypothesis is poor security selection combined with leverage as the main cause of this poor performance.

NMAI Trades At Massive Discount

From day 1, the NMAI fund has been trading at a discount to NAV, indicating investors do not have confidence in the fund's management or strategy. I don't blame them, with the poor investment performance mentioned above.

Conclusion

The NMAI fund is paying an attractive 13.0% current distribution yield. However, looking beneath the hood, we see its investment performance since inception on November 22, 2021 has been abysmal, with a -38% decline in NAV. Investors have lost confidence, as evidenced by the deep discount to NAV. I would recommend investors avoid this fund.

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