The move by leading financial managers to create investment strategies and products based on real assets is a signal investors should take advantage of. Investment managers across Wall Street and America have flooded into the real assets space and there is no expectation that trend will end.
Real assets are tangible assets whose values are tied to their substance. They include things like gold, oil, and lumber as well as real estate and infrastructure. In terms of your portfolio, they should be thought of as a third asset class alongside your stocks and bonds.
With US economic growth expected to accelerate in the coming quarters, real assets are going to be in short supply and that means profits for savvy investors. Nowhere is the demand for real assets more evident than in the real estate, and more specifically the housing, market. Demand for housing is at an all-time high and not well serviced by supply. This has led to sustained year-over-year price increases for real estate that are driving values and rents higher and higher.
The reason real assets has become so popular is simple. Real assets and companies who do business in the real assets space provide a steady source of long-term income, experience less volatility, and provide a hedge against inflation as their values are often tied to the dollar. An analysis by Center Square Investment Management shows a 20% allocation to real assets diversified across the space reduces risk and increases gains within a portfolio which is good news for investors in today’s volatile markets.
Brookfield Asset Management is a leader in the real asset space with more than100 years experience. Their fund, the Real Assets Income Fund, is a diversified closed-end fund focused on real assets investing. Its primary goal is to deliver high current income and it does that remarkably well. At current share prices, near $23.50, the fund yields more than 10% and it is sustainable. The fund has had to use a small amount of ROC (return of capital) to pay distributions but that is more than offset with unrealized increases in NAV that have occurred since the fund was launched late in 2016.
This is from a recent conference call discussing dividend health.
“Let me stress that there are three components of the dividend coverage. First is net investment income, which includes all the coupons on the bonds as well as the dividends received on the equities. Second is the MLP cash flows. MLP distributions are considered return of capital even though we’re getting that cash as a distribution. And then the third piece is capital appreciation, principally on the equities.
One measure of looking at all of these three components in totality is to look at the NAV erosion of the Fund. The Fund started life in 2016 at a NAV of $25 and we are currently at an NAV of $24.57. So, over the life of the fund since 2016, less than $0.50 of the Fund’s NAV has been, quote, eroded by over distribution. I think that’s a very high dividend coverage ratio so I would not expect a cut given the expectation for continued performance of the fixed income portfolio and hopefully continued gains in the equity portfolio.”
The Real Asset Income Fund portfolio is diversified among asset types as well as sub-industries of the real assets investment space. The fund earns income from yields on corporate bonds and securitized credit (residential and non-residential mortgage-backed securities) as well as dividends from MLPs, REITs and real assets equities. The fund’s managers use a dynamic allocation approach that has led them to expand more heavily into infrastructure over the past year but allocation is not centered in any one asset or class.
The appeal of the Real Assets Income Fund is multifaceted. It could be used to replace a portion of bonds within a portfolio and provide better risk-adjusted returns, it could be used to add diversity within a high-income portfolio or to any portfolio with the idea of reducing risk and gaining exposure to an underappreciated asset class. Whatever the reason the Real Assets Income Fund can help provide the income you want to fuel the growth your retirement portfolio needs. The Real Assets Income Fund trades on the NYSE under the ticker RA.