Brookfield Investment Management Inc, a wholly owned subsidiary of Brookfield Asset Management Inc (NYSE:BAM), has recently proposed to consolidate three of it's proprietary closed-end funds. The news came in a press release dated May 16th 2016, and has the approval of the boards of each fund. The funds in question are the Brookfield Mortgage Opportunity Income Fund (NYSE:BOI), the Brookfield Total Return Fund (NYSE:HTR) and the Brookfield High Income Fund (NYSE:HHY). The three funds, pending approval from shareholders, will be combined into one fund which would be called the Brookfield Real Assets Income Fund, the RA Fund. A special shareholder meeting to discuss and vote on the merger has been scheduled for August 5th, 2016.
The board's of each fund have approved the deal believing it is in the best interest of shareholders. The combined fund would provide a better opportunity for income, income growth and capital appreciation. The funds strategy would be a combination of strategy employed by the individual components providing a multi-asset, multi-portfolio manager approach intended to create more stable income streams with less volatility across market cycles. Additional benefits include increased demand on the secondary market due to the larger asset size and enhanced cost savings over time.
Brookfield Investment Management is an SEC registered investment adviser providing strategies in globally listed real estate and infrastructure, corporate credit and securitized credit. The firm has over $16 billion under management for clients including financial institutions, pension plans, sovereign wealth funds and high net worth individuals.
The Brookfield Real Asset Income Fund
The strategy of the new fund will be a combination of strategy employed by the three smaller funds. It will be a diversified, multi-asset, multi-portfolio manager strategy seeking to provide real returns above and beyond the broad market throughout the market cycle, and not tied to the performance of traditional stocks and bonds.
The fund will invest in infrastructure, real estate and natural resources in addition to fixed income and other invest-able debt instruments. Also, a small portion of the fund will be allocated to Real Asset Equity positions. Management of the portfolio will be split between Brookfield's Real Assets Credit Investment Team which currently manages the HHY, the Securitized Products Investment Team which currently manages BOI and HTR, and other teams under the umbrella of Brookfield Investment Management Inc.
The Brookfield Mortgage Opportunity Income Fund is a diversified closed-end fund focusing on the mortgage market. The investment objective is high levels of current income with opportunity for capital appreciation over the long term. As of last reporting the fund paid a dividend with yield near 10.3%, the 37th quarter of steady and stable distribution. The primary portfolio holdings are RMBS, residential mortgage backed securities, about 38%, with a secondary allocation to sub-prime loans, about 19%. Smaller allocations are given to commercial mortgage backed securities, corporate bonds, collateralized loan obligations and real estate based equities. The fund is currently trading at a-9% discount to NAV, in line with the historical average and up from a low near -16% set in late 2016.
The Brookfield Total Return Fund is another diversified closed-end fund, but with the objective of total returns, including short- and long-term capital gains, as well as high current income. The fund pays a dividend with yield near 10% at today's prices and has done so since mid 2012, when distributions were increased. The fund focuses on US Treasuries, mortgage and asset backed securities as well as high yield corporate bonds. The top three allocations, RMBS, CMBS and sub-prime securities total nearly 70% of portfolio value with most rated BBB or lower. The fund is currently trading at only a -3.25% discount to NAV, up from 6 months ago and well above the historical average of -8.36%.
The Brookfield High Income Fund has the sole objective of high current income with a lesser focus on capital appreciation provided the primary objective is not compromised. The fund also pays a dividend in the range of 10% at current share prices but this is down -20% as of the latest distribution. The fund is non-diversified, focusing on high yield bonds, debentures and other corporate debt vehicles, all with less than investment grade credit ratings or viewed as such by fund managers. Allocations within the fund allow up to 30% of non-US domiciled companies and 10% currently involved in bankruptcy proceedings. On a sector by sector basis the highest concentration is in the energy sector, just over 18%, followed by telecommunications, about 16%, and leisure, about 9.5%. In terms of credit rating, less than 5% are rated BBB or above, and nearly 90% are rated B or lower.
To help garner shareholder support Brookfield will cover the cost of restructuring so there is no fear of losing asset value during the transition other than what may normally occur due to market conditions. Also, there will be a 2 year expense cap following the closing of the deal intended to keep the annualized expense ratio for the RA Fund at or below 1.03%. The company has contractually agreed to waive or reimburse the fund in order to maintain this target. Compared to the original three funds this expense ratio will be roughly equal to the Brookfield Total Return Fund and below that of the Mortgage Opportunity Fund and the High Income Fund .
Once approved shareholders of the original funds will receive shares in the new fund based on net asset values. Brookfield Investment Management will be the funds adviser with the exception of the Securitized Credit portion of the portfolio, more on that below. The deal is contingent on each reorganization meeting shareholder approval, all are required for the RA Fund to come to fruition.
A sub-adviser has been nominated to handle the securitized credit portion of the portfolio, Schroder Investment Management North America. Schroder Investment Management recently entered a deal to buy Brookfield's Securitized Products Investment Team, the reason behind the nomination as sub-adviser. The deal is expected to close in the second half of 2016 and is not contingent on the reorganization of the closed-end funds. Likewise, the reorganization of the fund is not contingent on the sale; each are independent of the other. However, the appointment of Schroder Investment Management as sub-adviser to the fund or funds is subject to shareholder approval and the close of the sale. If the sale does not close Brookfield's Securitized Products Team will remain as adviser to the individual funds or the combined fund, whichever shareholders agree to.
A merger of the BOI and HTR seems like a good idea. These two funds invest in similar assets with similar objectives. The HHY stands alone in both its target securities and investment objectives which, along with the recent distribution cut, make it less than complimentary. Owners of HHY will gain the benefits of a larger fund, lower costs and stable dividend while owners of the other two may find their returns hampered. In the end it will all come down to how the merger is effected and the objectives laid out in the official prospectus, due to be released following SEC approval of the registration statement.
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