I was attracted to the Destra Multi-Alternative Fund (NYSE:DMA) initially because of the 45% discount on NAV, so I decided to take a look. If assets have a certain redemption value, there may be a return to their net asset valuemeans a quick win.
However, after reviewing the funds, performance and distribution policy, I believe investors should avoid this underperforming fund. While the idea of providing access to institutional-grade alternative assets is tempting, in reality DMA's portfolio is an eclectic mix of public finance companies, small private REITs, private investments and CLOs (without disclosing trancher ratings). I believe a fund-to-NAV discount of 45% is reasonable given the lack of liquidity and the poor quality of the portfolio.
Destra Multi-Alternative Fund is a closed-end fund ("CEF") that aims for long-term uncorrelated performanceResults for the broad stock and bond market. The DMA fund primarily invests in alternative strategies and asset classes, including real estate, private equity, alternative lending, commodities and hedging strategies. The DMA fund is under-recommended byValidus Growth Investors LLC, a boutique asset manager based in San Diego, California.
The DMA fund has approximately $100 million in assets and a high net expense ratio of 3.51% for the six months ended September 30, 2022.
The DMA Fund offers investors access to alternative institutional strategies that can generate returns that are uncorrelated to traditional asset classes such as stocks and bonds, without the high minimum investment requirements or lock-ins that these strategies typically require. The DMA Fund may invest in asset classes such as alternative lending, real estate, commodities and currencies, private equity and hedging strategies (Figure 1).
Destra Multi-Alternative Fund invests according to the "foundation model", typically used by foundations and foundations. Due to the fund's closed structure (CEFs have a fixed capital as shares can only be sold, not redeemed), DMA can use a long-term equity model that ETFs are not available.
According to the fund's analysis, the DMA fund has a low correlation to cash, bonds and stocks, helping investors benefit from diversification (Chart 2).
Figure 3 shows the asset allocation and strategy allocation of the DMA fund. As of March 31, 2023, 23% of the DMA Fund's assets are invested in listed securities and 71% of its assets are invested in unlisted private investments.
The fund has a large allocation of 45.3% to real estate and infrastructure, 26.5% to alternative lending, 13.5% to hedging strategies and 8.8% to private debt.
Figure 4 shows the top 10 holdings of the DMA Fund as of March 31, 2023. Overall, the DMA Fund is highly concentrated, with the top 10 holdings accounting for 59.5% of the portfolio.
Overview of the best holding companies
AppropriatelyPitchboek, DeathClarion Lion Industrial Trustis a large privately held industrial real estate fund managed by Clarion Partners with assets of USD 18.4 billion. Clarion Partners alone manages $82 billion in real estate through multiple strategies and is owned by Franklin Templeton. The Clarion Lion Industrial Trust is considered Clarion's “core fund” with a target investment horizon of 10 years (Figure 5).
Canyon CLO Fonds IIIIIIis Collateralized Loan Obligations ("CLOs") managed by Canyon Partners, an alternative credit manager that manages $8 billion in CLO assets. As an illustration, CLOs are typically broken down into securities with different ratings and risk profiles. From the description of the promotion on the DMA website iinventory reportIt is not clear what part of the CLO structure DMA has invested in.
No public information is available on thisKeep REIT. However, a footnote to the inventory report states that Preservation REIT "a related investment whose ownership exceeds 25% of the investment capital"It appears to be a private REIT that Destra is affiliated with, and the investment represents more than 25% of the REIT's equity."
According to hisLinkedinProfile,REIT treehouseis a private REIT dedicated to the acquisition, ownership and management of cannabis-related commercial and industrial properties, similar to Innovative Industrial Properties Inc. (PRICE) i NewLake Capital Partners Inc. (OTCQX:NLCP).
Interestingly, the URL redirects to TreehouseREIT.comReal estate group Aventijnso it's probably the same unit. Aventine Property describes itself as a private REIT that provides real estate to the cannabis industry.
GoSiteis a payment and billing solution for small business owners. The company's website does not disclose how many customers it has and what revenue and profit it generates.
Healthcare Trust, Inc.is a small, publicly traded (preferred stock) REIT focused on senior housing and office buildings. According to the companyRapport 10-Qlost USD 25 million in the first quarter of 2023 and was also unprofitable in 2022 (Chart 7).
Owl Rock Capital(ORCC) is a publicly traded Business Development Corp ("BDC") that provides specialist financing to medium-sized businesses.
ready capital corp(RC) is a real estate finance company specializing in loans secured by commercial real estate.
Historical returns of the DMA fund are shown in Chart 8. Please note that due to the fact that the DMA fund was only listed on January 10, 2022, services such asMorning starThere are no historical market returns for the fund beyond the 1 year horizon.
However, the DMA fund was previously a private closed-end fixed-term fund and therefore has NAV returns. The overall return of the fund was very disappointing with an average annual return of -2.9%/1.7%/-1.7%/-1.9% through 30 April 2023.
The efficiency is well below the equipment model
This is evident from an article by investment advisersMercerThe long-term investment model generated an average 10-year return of approximately 7-8% between 2010 and 2020 (Chart 9).
However, if you look at the DMA fund, it generated oneNegative10-year cumulative annual return of -1.9%. While the time periods analyzed are not exactly the same, this illustrates the range of poor DMA performance.
distribution and yield
While the DMA fund generates a low total shareholder return, it offers a high distribution yield with a recently announced monthly payout of $0.0533 per share, a forward return of 11.3%. With net asset value, the fund's return is more modest and stands at 6.1%.
Investors should note that the DMA Fund generates a small net investment income. Instead, the vast majority of its historical payouts have been funded by return on capital ("ROC") (Figure 10).
Funds that do not receive a distribution will be liquidated"The Return of the Headmaster"Middle. As I have discussed several timesArticleCapital gains funds are problematic because the fund must liquidate its net asset value to fund its payouts. This depletes income-producing assets, making it even more difficult to fund future distributions. In the long run, equity fund returns are characterized by depreciation of the net asset value and declining payouts.
Sold with a big discount
Investors seem to have noticed the low quality of DMA's assets and have discounted the fund's assets by 45% (Chart 11).
Given the Fund's investments in certain small, diversified private REITs and private investments, a large discount to NAV may be appropriate to account for illiquidity and potential write-offs.
For example, given the sharp declines in IIPR stocks over the past year (Figure 12), I find it incredible that DMA actually increased the value of two private cannabis REITs in the six-month period ending September 30, 2022 (Figure 12). 12). 13).
Having reviewed the fund's assets, returns and distribution policy, I would advise investors to stay away from this fund. While the idea of accessing institutional-grade alternative assets sounds tempting, DMA's portfolio is an eclectic mix of publicly traded financial companies and small private REITs and private equity investments.
The long-term return profile has been very disappointing, with an average annual return of -1.9% over 10 years, compared to the 7-8% typically achieved by foundations and endowments that follow the same long-term investment model.
The only plus is the DMA payout, which offers an attractive return of 11.3%. However, most distributions are funded by return on equity, so investors are better off putting their money in a money market fund and withdrawing the balance.
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This article is written by
I was co-founder and CIO/hedge fund manager for 5 years. Previously, I was a hedge fund analyst/portfolio manager at a leading Canadian alternative asset manager. I write articles as part of my own due diligence on stocks that I find interesting for one reason or another. Follow me on Twitter for my take on macro trends.
Analyst Disclosure: I/We do not hold any shares, options or similar derivatives in any of the listed companies and do not intend to take any positions within the next 72 hours. I wrote this article myself and it expresses my own opinion. I do not receive any compensation for this (except Seeking Alpha). I am not affiliated with any of the companies mentioned in this article.
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