Risks:

In addition to the attractive qualities of this investment opportunity, it is also important to consider some of the more significant risks involved with investing in DRA. For example, as we just mentioned in the previous paragraph, there is no guarantee that the discount will ever get better, and it could actually get bigger which would be a detractor from your long-term investment performance.

Leverage: This fund uses a relatively significant amount of leverage, and that is a risk. Specifically, the fund’s current leverage ratio is 29.45%. This means for every $1 this fund has, it can get exposure to approximately $1.29 worth of investments. This can be very attractive in the good times (i.e. when the market goes up, this fund could go up more) but it can also be very unattractive in the bad times. For example, if the market declines, this fund could decline more (because of the leverage), but it could also be forced to sell its holdings at distressed levels to maintain a reasonable distribution to meet investor needs if the individual holdings in the fund cut their dividends or default on their interest payments. It’s generally not good to be forced to sell things at distressed prices.

Management Fees: Another risk factor for this fund is the management fee. At Blue Harbinger, we generally despise management fees because we understand fees detract from long-term investment performance. However, in some cases, it may be acceptable to pay the management fee. For example, if you are a mature, retired (or semi-retired) investor, and you need the regular big distribution payments to meet your living expenses, then it may be worthwhile to invest in this fund.

However, if you are a younger investor still saving for retirement, then this fund is probably NOT a good investment for you (i.e. you’d be better off investing a very low cost ETF because you don’t need the big distribution payments yet, and the value of your investment will growth faster over the years as the benefits of the fee savings compound over the years). For reference, this fund’s expense ratio was recently 1.12% which is significant, but not unreasonable for a closed end fund. And for disclosure purposes, this fund’s total expense ratio was 2.22% if you factor in the cost of the leverage it uses (for regulatory purposes, CEFs using leverage must report interest expense as part of their total expense ratio).

Market Exposure: Another big risk of this fund is simply market risk exposure. For example, the majority of this fund’s holdings are equities (common and preferred) and if the stock market declines, this fund will likely also decline. Further, this fund’s equities are concentrated in a few sectors (mainly REITs and utilities) so if these sectors decline, then the fund will likely be impacted negatively. However, worth noting, because of this fund’s big monthly distribution payments, it may be much easier for investors to tolerate the ups and downs of the market. Additionally, funds that pay big regular distribution payments (like this one) generally decline significantly less when the overall market declines (i.e. the big distribution payments help cushion it from declines).

Conclusion:

If you are a contrarian, income-focused investor, this Diversified Real Asset Income Fund of Beneficial Interest (NYSE:DRA) may be worth considering. Specifically, we like that it provides access to real assets across the capital structure (common, preferred, debt), and we like the specific sectors that it invests in (real estate and utilities/infrastructure). We also believe its currently discounted price (versus its NAV) makes now an even more attractive time to consider this fund for an allocation within your overall, diversified, income-focused, investment portfolio.

Note: This article was written by Blue Harbinger. At Blue Harbinger, our mission is to help you identify exceptional investment opportunities while avoiding the high costs and conflicts of interest that are prevalent throughout the industry. We offer additional free reports and a premium subscription service at BlueHarbinger.com. If you are ever in the Naperville, IL, USA area, our founder (Mark D. Hines) is happy to meet you at a local coffeehouse to talk about investments. Please feel free to get in touch.