Brookfield Real Assets Income Fund Set to Move Higher

In December 2016, Brookfield Asset Management merged three of its funds (HHY, HTR and BOI) to form the combined Brookfield Real Assets Income Fund (NYSE:RA). Since then, RA has helped raise Brookfield’s profile in the asset management sector and infused flexibility into the fund’s asset allocation.  RA is also showing signs that a bullish reversal has been in place since the middle of March.

The three original funds had a focus largely on debt.  But these more recent moves have allowed Brookfield to pursue a more dynamic approach, allowing investment decisions to be dictated more closely by the changing needs of the market.  

The fund’s elder sibling is the Brookfield Global Listed Infrastructure Income Fund (NYSE:INF), which was formed way back in August 2011.  When looking more deeply into the fund, we can see that 80% of its managed assets are in publicly-traded securities tied to companies in the infrastructure sector.  INF has $196.46 million worth of assets under management, and the stock has moved steadily higher since the beginning of 2016.

Impact of Political Upheavals and Monetary Policy

As is the case with most of the market, the impact of political upheavals on these stocks should not be ignored.  We are still seeing escalating trade tensions between US, China, and the Eurozone – and this is having a rippling effect throughout stock exchanges across the globe.  This generated many of the declines experienced in stocks such as RA and INF during the month of March 2018.

Ultimately, those declines can be viewed as new buying opportunities for the stock.  In March, RA saw a steep drop in share prices, falling by 9.9% from its earlier highs of $23.93 in January.  To a large extent, these bearish moves can be attributed to the panic felt by investors which relates to potential interest rate increases at the Federal Reserve.  This was especially true after the release of January’s nonfarm payrolls report.

Deeper NAV Discounts and Higher Returns

On a YTD basis, RA is trading lower by -2.14% and INF has shown losses of -4.8% over the same period.  This creates added discounts for investors relative to net asset values.  With $888.3 million in net assets, RA has consistently generated higher returns through current income values and capital growth. RA’s most recent monthly distribution was $0.1990 per share and its NAV discount currently stands at 5.29%.

RA’s weighted average duration of 1.4 years is another positive sign for the prudent investors.  When considering the rate of inflation and the consistently upward path of interest rates, it is important to understand that there will be repricing effects in most of the fund’s assets.  As rates go up, RA stands to gain (due to its weighted average period).

On the negative side, the Undistributed Net Investment Income (UNII) for the stock should be noted.  Since UNII is a direct indicator of dividend payment availability, investors focused on income might highlight the possibility that Brookfield will have distribution difficulties.  However, when looking at the larger picture, we must understand that roughly 41% of all closed-end funds have a negative UNII. In the case of RA, this risk is partially mitigated as a portion of its current portfolio is devoted to infrastructure companies that pay their distributions as return-on-capital.

Elevated Dividend Yields

In all likelihood, the fund could continue to attract income investors because of its elevated payouts.  RA offers broad exposure to U.S. and International securities with investments in high-yield and floating-rate debt assets.  The stock yields 10.43% at current price levels ($2.39 per share). This creates some interesting opportunities for value investors given the recent declines in share prices.  The promise of elevated income and a diversification into real assets helps RA stand out in the current market environment.

Similar characterizations can be made in relation to INF, which most recently paid a monthly distribution of $0.817.  On an annualized basis, this represents a dividend payout of $0.98 per share, and a percentage yield of 7.94%.  As the stock continues on its positive trend, broader sentiment seems to be falling in line with expectations. Accern Sentiment Analysis is now seen giving the stock a positive score of 0.15 on the Accern scale.

All together, the outlook looks stable and investors should consider RA as a steady option in closed-end funds that is prepared to capitalize on its four core advantages: portfolio diversification, a closing discount to NAV, strong probabilities for capital appreciation, and its elevated dividend yields for income investors.