Brookfield Corp. BN-T launched its Select Opportunities Income Fund BSO-UN-T in 2014 with three objectives: provide holders of its units with quarterly cash distributions; maximize total return; and preserve capital.
It failed to achieve the latter two goals. It’s now likely abandoning the first, with an announcement in early January that, because of the fund’s dwindling size, it may suspend payouts.
The fund now trades at 20 per cent of its initial value and is one of the worst-performing equities on the Toronto Stock Exchange in 2023, down more than 50 per cent.
It’s a rare misstep for Brookfield, the stewards of capital who collected more than US$90-billion in new money last year from institutional investors who hope to piggyback on the money manager’s acumen. Unfortunately, the typical Brookfield magic eluded the retail investors who put the TSX-listed fund in their portfolios.
It seemed like a good idea at the time. Brookfield’s public securities group launched Brookfield Select Opportunities Income Fund nearly a decade ago with a focus on high-yield corporate debt and publicly-listed shares of infrastructure and real estate companies – Brookfield’s specialty.
Brookfield raised $192-million by selling 19.2-million units at $10 apiece. After offering expenses, its net asset value – the primary metric for fund valuation – was $9.48 per share.
Brookfield Select Opportunities Income Fund isn’t a conventional mutual fund. Instead, Brookfield structured it as a “closed-end fund,” which trades on the Toronto Stock Exchange like an equity. So the price of the fund changed each day, based on how much investors were willing to pay for it.
It’s fair to say the fund stumbled out of the gate. From its May 23, 2014, debut to year end, the fund posted a 16.1-per-cent loss, carving $26.6-million from its assets. In its first annual report, Gail Cecil, a managing director of Brookfield Investment Management (Canada) Inc., called the results “disappointing” and highlighted the “remarkable” 50-per-cent drop in the price of oil that hurt the fund’s holdings in energy and energy-sensitive infrastructure securities. Illiquidity in the corporate bond market and the fund’s use of borrowing to amplify returns also hurt.
Amazingly, 2015 was worse, with a 27.5-per-cent investment loss eviscerating another $35.7-million in assets. More oil price declines and a bloodbath in high-yield bonds were the culprits.
Certainly, the first two years were not indicative of what followed for the fund, as it had a few good periods. The fund returned 33.8 per cent in 2016 and posted double-digit returns in 2019 and 2021.
But the massive losses at the beginning – nearly half the assets evaporated – made it difficult for the fund to weather any future storms. And the continuation of the quarterly payout of 15 cents per unit sent millions more in assets out the door. They weren’t technically dividends or profit-sharing, as the fund hadn’t recorded enough investment gains to make that possible. Instead, they were classified as returns of investors’ capital.
“In the earlier years of the fund, the fund’s exposure to the energy and energy infrastructure sector negatively impacted the fund’s performance,” spokesperson Rachel Wood said in an e-mailed response to questions. “The fund’s current holdings are diversified across real asset sectors (real estate, core infrastructure, basic materials) and the investment team has tried to minimize volatility while simultaneously enhance income opportunities.”
In the Brookfield fund’s most recent annual report, it says it had a lifetime investment loss through the end of 2021 averaging nearly 4 per cent per year, well below the returns of two benchmarks, the BofA Merrill Lynch US High Yield Index (up 5.3 per cent) and the S&P/TSX Composite Index (up 8.1 per cent).
Then, the fund lost 9.2 per cent in the first six months of 2022.
Investors who simply rode the Brookfield train in other ways did far better: From the debut of the Brookfield Select Opportunities Income Fund in May of 2014 through this week, the shares and units of Brookfield Corp. and Brookfield Infrastructure Partners themselves are up more than 200 per cent.
Ms. Wood, the fund spokesperson, said “Given the uniqueness of the portfolio makeup and focus, there is no single index or comparator in the broad market that is appropriate for context.” Comparisons with the two large Brookfield entities are imperfect, she says, because Brookfield Corp. and BIP own, control and operate assets, unlike the fund.
By June 30, the most recent report of fund performance, net assets had fallen to just over $11-million. The 60-cent-per-unit distribution was still in place, costing about $3.6-million per year. The management expense ratio, a measure of the costs of running the fund, topped 3 per cent.
If you can see where this is going, count yourself ahead of certain holders of the fund. For most of December, 2022, the fund traded above $5 per unit, well above the net-asset-value per share of less than $2. A 60-cent annual distribution (an 11-per-cent yield) can support that price.
Then Brookfield Public Securities Group put out a statement Dec. 19 saying that while it would pay its distribution Jan. 6, it was “considering various strategic alternatives for the fund given its small size. This includes, reducing the fund’s quarterly distribution in 2023, a potential reorganization into another fund or liquidation of the fund.” After the record date for the distribution, the fund’s price dropped below $2 per unit, much more in line with the assets in the fund. (Brookfield expects to make an announcement by the end of this quarter.)
One winner, it might be argued, is Brookfield itself, which has collected $6.55-million in management fees since the fund’s inception, despite its putrid performance. Certainly, that amount of money is pocket change for the Brookfield colossus, which counts its profits in the billions. In retrospect, however, it seems like most of the opportunity in the Opportunity fund went to Brookfield, not the poor folks who bought in hoping to benefit from its reputation.