Closed-end funds depend on their management. Without good management, any closed-end fund starts spiraling down faster than a house of cards. And that's exactly is the case with the Blackrock Global Opportunity Equity (BOE) CEF. It is one of those closed-end funds that have been performing badly for the last five years. And it must be noted that in the world of compounding, a high percentage rise might not match up to a low percentage fall. In short, the following thesis helps you dig deeper into the fundamentals of this fund and why it might not be the best to invest your money in right now.
In the last one month, the market price has increased by nearly 7%. That's a good monthly increment, to be honest. But is the fund good enough to invest in the first place?
Let's know about the fund a bit. Here's an excerpt from the main site:
The BlackRock Global Opportunities Equity Trust is a perpetual closed-end equity fund. BOE commenced operations in May 2005 with the primary investment objective of seeking current income and current gains, with a secondary objective of long-term capital appreciation. Under normal market conditions, the Trust will invest at least 80% of its total assets in equity securities or options on equity securities or indices or sectors of equity securities. Equity securities in which the Trust anticipates investing include common stocks, preferred stocks, convertible securities, warrants, depository receipts and equity interests in REITs. The Trust may invest in companies located anywhere in the world. The Trust may invest in companies of any size market capitalization and in companies conducting initial public offerings. The Trust may invest up to 25% of its total assets in equity securities of issuers in emerging countries.
Unfortunately, over the past 5 years, return was in the negative.
Wait! Does it seem like the NAV improved over the last few years? You need to look at this.
In short, you are losing money with this fund. Moreover, the management expenses always eat into the portfolio value. So, in Robert Kiyosaki's words: "It is NOT an asset, it's a liability."
Let's look at the relative movement of NAV and market price of each share.
Two things can be noted here.
Firstly, if you look closely at the first graph, the market price per share has always been below NAV per share. And it has been more or less an indicator of the future NAV at any point of time. If that's the case, then the NAV is surely going to increase in the near term. But looking at the 5-year graph below, the people who invest at the initiation of the fund have a strong chance of losing on their investment.
Moreover, it seems the market price is always below the NAV. In that case, you will never be able to get positive return on your investment, as it seems. That's not a good position to be in.
Going a bit deeper into the portfolio, let's try to find out whether the NAV can improve over time. Remember, we are factoring in the performance during Great Recession as well. With 74.1% in large cap ($10B - $200B) stocks and 51% of net assets residing in U.S., we can safely say that with the improvement of the U.S. economy, the NAV should go up in the few years to come.
Let's look at the fund's top 5 stock investments.
Change in stock prices of the top five stock assets in the last one year:
Exxon Mobil Corporation (XOM) - 3.35%
Svenska Cellulosa AB SCA (SVCBF.PK) - 27.1%
Apple Inc. (AAPL) - 19.61%
Wells Fargo & Company (WFC) - 14.15%
Subsea 7 SA (ADR) (SUBCY.PK) - 19.82%
This is somewhat counter-intuitive. When the underlying stock prices are going up, why is the NAV of this fund struggling to break-even?
Two probable reasons:
- 51.58% of the portfolio is overwritten. In another words, 51.58% of the total stocks assets are being offset by stock options. It is most likely that the total cost of option premiums is eating into the portfolio value. And this shows that the management's value addition is probably nil or in the negative.
- High percentage of managerial expenses. Following up the point above, you will basically be paying the management for negatively affecting your portfolio. That's ludicrous, in every sense of the term!
If you are a value investor, you should stay clear of this closed-end fund. It's highly unlikely that the fund will be able to give you sufficient profitable returns in the long run. But it is noteworthy that if you think you want to play for the short-term, now might be a good time.