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

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

The Fund

Brookfield Real Assets Income Fund Inc. was formed 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 objective is to generate growth of capital. The fund invests in real assets, which includes real estate securities, infrastructure securities and natural resources securities. RA has invested almost 10 percent in each of the specialized sectors, such as utilities, cyclical, real estate, and defensive sectors.

65 percent of the entire fund is invested in fixed income securities. However, the average coupon of those securities are much lower than the yield the fund is generating. Average coupon currently stands at 4.74 percent, in comparison to a trailing twelve month (TTM) yield of almost 12 percent. The quality of fixed income securities is poor too. More than 90 percent of the securities are rated BB or lower than that. On top of that more than 90 percent of investments have a maturity of more than 5 years.

Impact of Interest Rates

During the past few years, the interest rate was quite low. This helped this Real Assets Income Fund in multiple ways. Lower interest rates allowed real estate and infrastructure companies to access capital at a lower rate and thus generate a higher return. Lower interest rate also helped the yield on this CEF look much better. Lower interest was also helpful for this fund to use leverage in its investment portfolio. However, as interest rate is expected to get 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, which is much lower than that of the index. Sharpe ratio measures the average return earned in excess of the risk-free rate per unit of volatility or total risk. Volatility of a fund is a measure of the price fluctuations of its entire portfolio. To calculate the Sharpe ratio, first the risk-free rate is deducted from the portfolio’s rate of return and then, the result is divided by the standard deviation of the portfolio’s excess return. So, a lower Sharpe ratio signifies an inferior performance of the fund.

Is the Dividend Sustainable?

In addition to a low average coupon of less than 5 percent, there has hardly been any price growth for the fund. This implies that this fund is generating such high pay-out out of its capital. Another factor to be considered about this fund is that only 13 percent of its entire holdings are held by institutional investors. In general, institutional investors have a very high stake on real assets, due to their defensive nature. Moreover, funds that generate a high yield by and large attract all types of investors.

High Expense Ratio

Brookfield Real Assets Income Fund has an exceptionally high expense ratio of 2.13 percent. The primary reason behind such a high ratio is the percentage of fees paid to the fund advisor, which currently is 1.41 percent. Such high charges paid for a fixed income based fund that is also investing in the real assets, makes little sense. Moreover, this expense ratio doesn’t seem to decline much, as the “Advisory Agreement provides that the Fund shall pay the Adviser a monthly fee for its services at an annual rate of 1 percent of the fund’s average daily net assets plus the amount of borrowing for investment purposes.”

Investment Thesis

Almost since its inception, Brookfield Real Assets Income Fund has generated an average yield between 11 to 14 percent, with a consistent monthly pay-out of $0.1999. Such a high yield with a steady monthly income, usually would have been quite lucrative for the income seeking investors. However, the fund raises various concerns regarding its performance, and future sustainability of such a high yield. To start with, the fund has a very high expense ratio, which doesn’t seem to come down in the foreseeable future due to the commitment made in its advisory agreement. RA also has quite low sharpe ratio, which implies that the average return earned over its total risk is not that high.

Brookfield Real Assets Income Fund invests primarily in fixed income securities, the average coupon of which are much lower than the yield the fund is generating. The quality of fixed income securities is poor too, and almost 90 percent of investments have a maturity over 5 years. This compels the fund to stick with such poor quality of assets, even if the fund sees some dangers in the long term. Moreover, there has hardly been any price growth for the fund. This CEF thus seems to be generating such high pay-out out of its capital. The expected interest rate hikes also put this fund in a disadvantage. Under such circumstances, it’s better to stay away from this CEF despite it generating a double digit yield.

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