Another Closed-end Fund play: DRA
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!