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Another Closed-end Fund play: DRA

September 19, 2014

As I noted in my last blog I’m looking for a place to park some cash that is relatively safe but will give me some kind of short-term return. No money market funds thank you! Rates at money market funds are close to or at zero and we know what a liquidity crunch could do to those guys…just think back to the Fall of 2008! I want my money available at the click of a mouse. So, as I blogged before, I’ve been looking at closed-end funds that have some catalyst for value creation (primarily discount reduction with the hopes of picking up not only a little income but maybe even a bit of capital gain). In this post I’m spotlighting a new fund, Diversified Real Asset Income Fund (DRA). Now, mind you, new closed-end funds are only for suckers; after being priced at the offering they immediately fall to or below net asset value, some 8 to 10 % below the offering price. This is because there is an underwriting fee included in the offering price and then the market usually assigns a discount to closed-end fund shares due to liquidity concerns or whatever. So why am I blogging about a new closed-end fund? This case is a bit different. To be honest, DRA is not really a new fund. Bulldog (you remember them from my last post, no?) had been pestering American Strategic Income Portfolio Funds (I, II and III) management for a couple of years to do something about the persisting double-digit discount to net asset value at which the funds shares were trading. After unsuccessfully trying to outwait the activists what fund management came up with was a 2-step plan; folding the three funds, American Strategic Income Portfolio I, II and III into one fund (creating operating savings… for the asset manager, obviously!) and a series of potentially 3 tender offers for up to 30% of the outstanding shares. In addition, the asset management contract passed to a higher class asset manager, Nuveen. The Great Amalgamation was completed last week and the newly created combined fund was (re)named, you guessed it, Diversified Real Asset Income Fund (DRA). They come up with the most meaningless names, don’t you think? I have no idea from the name what the fund actually invests in. Well, alright I did read the press release and noted that they invest in real estate stuff, infrastructure stuff and perhaps some other things. They put it this way, “The Combined Fund’s broader investment mandate is expected to result in a more liquid portfolio over time with less emphasis on whole loans and mortgage-backed securities”. Any less amorphous than my characterization? So, with the combination completed (no value creation for us shareholders yet) we should be looking for the first tender offer (at 99% of NAV) by the end of the year. That tender should be for 10% of the outstanding shares. The second tender is supposed to occur within 6 months of the first, and the third 6 months thereafter, but only if the discount to NAV remains above 10%.

So why invest? My rationale is that, despite its miserable track record, the shares may offer value as 1) there is a new, reputable asset manager, 2) shares are selling for an 11% discount to NAV, and 3) while you hold, waiting to tender your shares, you get an 8%+ yield. My macro view is that the interest rate rebound theory has been overdone and I don’t see rates rising rapidly in the next year, thus I am comfortable with holding a leveraged fixed income position. That’s right, the investment theory depends on one’s outlook in fixed-income-land. These types of funds get double-whammied when interest rates spike; once because as interest rates go up their investments decrease in price and again because their cost to borrow goes up reducing their cash flows for dividends. Now whether my macro view is right or whether the new fund manager will perform better than the previous manager (note that NAV has already dropped over 1% since the Amalgamation!) or whether the tender offers will even happen are unknowns. So don’t take my investment analysis as a way to make money.. always do your own analysis before investing!

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3 Comments
  1. Brian H permalink

    Bravo! Nice find, Prob a 20% IRR had one acted on this

  2. A couple things. The lead PM of this fund and its predecessors, John Wenker, remains the same. He’s been one of the PMs since 1992, first with US Bank and now with Nuveen.

    You left out a fourth CEF, American Select Portfolio (former ticker SLA), that was also rolled into DRA. I had not connected the dots until today, but this is the same fund and management that the folks at Roumell wrote about very favorably in their Q4’13 letter. I don’t want my comment to get filtered because of a URL but you can read it at roumellasset dot com.

    On performance, the NAV-based 10YR total returns for ASP and SLA (shown in the June 30 annual report) were both strong compared to their benchmark. For BSP and CSP, not so much. I don’t know the story there. Buying at wide discounts to NAV and selling closer to NAV has been a winning strategy over time.

    One negative – Wenker is listed as a beneficial owner of only $100,001 – $150,000 of the funds as of June 30. Maybe there’s more I don’t know, but on the face of it, that’s a piddly stake.

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