RA - RA: Favoring Real Assets Over AI But Credit Risk Is A Problem

2023-07-21 13:37:21 ET

Summary

• Brookfield Real Assets Income Fund Inc. focuses on investing in fixed income markets of the United States, primarily targeting securities and other instruments of companies linked to real assets.
• The fund's performance has been steady despite the volatile nature of the markets it operates in.
• Given the high concentration of assets in the energy sector and utilities with high debt loads, the credit risk is substantial.

Prophesy is a good line of business, but it is full of risks. - Mark Twain.

The Brookfield Real Assets Income Fund Inc. ( RA ) is a product of Brookfield Investment Management Inc. The fund focuses on investing in fixed income markets of the United States, primarily targeting securities and other instruments of companies linked to real assets. These encompass real estate securities, natural resources securities, and infrastructure securities.

The nature of real assets adds a level of stability to the closed-end fund, or CEF, as these assets have intrinsic value that often remains robust even during market fluctuations. The primary appeal of the fund is its high yield, offering a dividend of 4.85%.

Analyzing the Fund's Performance

The fund's performance has been steady despite the volatile nature of the markets it operates in. The NAV (Net Asset Value) of the fund has remained relatively stable, considering the challenges posed by the energy sector and the high yield credit market. Most of the fund's return has come from the distribution yield, making it an attractive prospect for income-focused investors.

The fund has historically traded at a discount to its NAV, which narrows during market upturns. Currently, the fund trades at a premium to its NAV after a period of overselling of corporate bonds at around 13.30%.

A Closer Look at the Fund's Holdings

The RA fund's holdings are diverse, with a mix of fixed income instruments and equities. The fixed income allocation includes residential mortgage-backed securities and corporate bond issues from various sectors. The credit profile of the fund leans towards the lower end of the scale, with a significant portion of the assets either unrated or rated BBB and below. This concentration of credit risk contributes to the high yield but also introduces the potential threat of defaults, making it an instrument you'd only want to really consider if you aren't worried about an impending credit event.

Assessing the Risks

Investing in RA comes with its share of risks. Given the high concentration of assets in the energy sector and utilities with high debt loads, the credit risk is substantial. We know Energy has clearly not performed well this year so far, and any kind of deflation pulse likely serves as a big headwind for the fund's holdings.

The Role of Real Assets in an Investment Portfolio

Taking a step back, real assets play a crucial role in an investment portfolio due to their intrinsic worth and low correlation to financial assets like stocks and bonds. They include physical real estate, equipment, commodities, natural resources, and metals. Investing in real assets can provide a buffer against inflation and market volatility, making them a good alternative in uncertain markets. And with the AI/Technology play massively overstretched, there is an argument to be made to broadly rotate into real assets away from overvalued digital ones.

Conclusion

The Brookfield Real Assets Income Fund presents an intriguing investment opportunity for those seeking high yield. The premium to NAV I find problematic at this stage, and in general I maintain the view that a credit event is out there. I think RA is one to keep on a watch list for a dislocation in the bond market to position into after.

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