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Tender results for DRA

November 14, 2014

The first part of my investment thesis for the Diversified Real Asset Income Fund (DRA) has panned out; they just completed one (out of a potential 3) self tender offers at 99% of NAV. Unfortunately, just like me, there were a number of other fund holders who tendered, and the tender offer was waaaayyy over subscribed. In fact, owners of 2/3 of the total shares outstanding tendered their shares. That means 2/3 of current fund shareholders just wanted to get their money back! I guess nobody was very happy with the historical performance of the fund!

The tender offer was structured to repurchase 10% of outstanding shares (approx. 2.5 million). With over 16 million shares tendered I was only able to sell 15% of my shares. As I said, I am comfortable holding this fund for at least the next 6 months. If over that timeframe the discount to NAV doesn’t average below 10% (today its around 11.8%) the fund will have to conduct a second tender for a further 10% of shares outstanding. In the meantime I’ll be collecting my 7% interest!

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4 Comments
  1. Brian Roach permalink

    What’s your view of DRA’s use of leverage?

    • Thanks for bringing this up. Many income funds, including those investing in corporate, agency and municipal securities, use some sort of leverage to increase the yield, and therefore the attractiveness to investors, of their fund. It’s important for investors to understand that this leverage not only magnifies returns on the underlying securities (most of the time) but also magnifies price swings of the funds’ shares. DRA has about $155 million of debt outstanding on a total fund net asset value of $508 million, for a debt to asset ratio of about 31%. It appears they use reverse repos to increase this leverage to about 37%. This ratio seems to be toward the high end of where leveraged funds usually are.
      What’s important to remember is that the amount and type of leverage used will impact the price of the fund’s shares as well as fluctuations in the market value of the securities these funds hold. For example when interest rates rise (as they are forecast to do toward the end of 2015) the value of the fund’s holdings will likely go down (higher rates = lower price, in the fixed income world). Additionally the fund will likely have to pay more interest on the debt it has outstanding. This may result in less cash available for distributions, further depressing the price of its shares. This change in the discount or premium of the shares of closed end funds tends to magnify the volatility of the underlying securities.
      I am happy to hold DRA because of my view of the fixed income market, at least over the next 6 months; rates should stay about were they are today. If you don’t hold this view you should be liquidating shortly.
      Remember this is not investment advice! Do your own homework!

  2. Maybe this isn’t the best way to contact you, but I haven’t found a better way. When you invest in funds, what exactly do you look for? A clear catalyst? I found a company, which more or less owns a fund, that sells at a nice discount even though the fund compounded at ~20% for quite a while, but I have no idea how I should approach my valuation process…
    Maybe the idea is helpful for you.
    There is also a good write up on VIC: http://www.valueinvestorsclub.com/idea/SENVEST_CAPITAL_INC/117848#description

    • Senvest Capital is not a closed end fund but a fund manager. The listed company is, in fact, more complicated that just a strait-forward fund manager like Fortress, however. If you look closely at the public company’s structure you will see that it is highly levered to the funds’ returns, so beware. There is also very little transparency as to the inner workings of the public company.

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