Last week, my wife and I had a discussion about the potential threat of climate change and global warming. My wife is very concerned, and feels that society has been underestimating the risks. I tend to be more undecided on this, and until now I haven't seen much impact on the financial markets.
But yesterday, I saw an article in the New York Times - "Industry Awakens to Threat of Climate Change" - which contained the following excerpt:
"Today, after a decade of increasing damage to Coke's balance sheet as global droughts dried up the water needed to produce its soda, the company has embraced the idea of climate change as an economically disruptive force."
The annual four-day World Economic Forum was recently underway in Davos, Switzerland. All day Friday was devoted to panels and talks on the threat of climate change.
There is a closed-end fund that may offer a diversified way to benefit from future economic changes related to climate change. BlackRock EcoSolutions Investment Trust (NYSE:BQR) was formed in September 2007. BQR primarily invests in equity securities issued by companies engaged in new energy, water resources and agriculture business segments. The fund does not use leverage, but does use an option strategy overlay to enhance gains.
This is the investment sector breakdown as of September 30, 2013:
Top 5 Sector Breakdown (as of 09/30/2013)
Top 10 Country Breakdown (09/30/2013)
Top 10 Stock Holdings (as of 10/31/2013)
Aqua America Inc.
Sao Martinho S.A.
Inversiones Aquas Metropolitanas
Brasilagro-CIA Bras de Prop Agricolas
Portfolio Characteristics- Option Overlay (9/30/2013)
Type of Options
Percent of Portfolio Overwritten
BQR can be viewed as a contrarian investment since it has underperformed the world stock indexes since its inception. Some of the underperformance is due to the option overlay, but the industry sectors have also lagged the overall market.
Total Return BQR NAV EAFE Index
Here is the yearly total return NAV and market performance record starting from 2008:
Notice in the above performance table how there have been big differences between NAV performance and market price performance. This has occurred because of the big swings in the discount or premium to net asset value. BQR sold at discounts as large as -25 percent back in 2008, but has also traded at a premium above 10% in 2009 and 2010.
The larger variations in discount/premium are good for an opportunistic trader who is purchasing BQR in a tax deferred retirement account. The high volatility of the discount or premium can lead to more trading opportunities than with other closed-end funds that trades at a discount/premium that hardly moves.
The expense ratio of 1.41% is a bit on the high side, but not too bad for a global fund. BQR can be a good holding in both taxable or tax deferred retirement accounts. In a taxable account, the option overlay allows BQR to pay out a large portion of the annual distribution as return of capital. This is a significant tax advantage since the tax on these distributions is deferred - you lower your cost basis and pay the tax only when selling the underlying position.
In an IRA account, the return of capital has no special tax advantage, but the large distributions are still beneficial since you are recapturing a portion of the discount to net asset value.
These are the distribution for the last year along with how much of each distribution was return of capital:
Ex Date Pay Date Distribution Return of Capital
Here are some other summary statistics on BQR:
- Total Net Assets: 110.55 Million
- Annual Distribution (Market) Rate= 9.24%
- Last Distribution= $0.1793 (paid quarterly)
- Fund Expense ratio: 1.41% Discount to NAV= -12.7%
- Portfolio Turnover rate: 94%
- Leverage: None
- Average Daily Volume (shares)= 68,000
- Average Daily Dollar Volume = $500,000
BQR is currently selling at a discount to NAV of -12.7% compared to the 52 week average discount of -10.15%. Here are the Z-statistics for the discount to NAV:
- 2-year Z-statistic = -1.11 (average 2-year discount= -6.68%)
- 1-year Z-Statistic = -0.68 (average 1-year discount= -10.15%)
- 6-month Z-Statistic = +0.58 (average 6 month discount= -13.37%)
- 3-month Z-statistic = +2.08 (average 3 month discount= -14.18%)
Using these Z-statistics, the current discount to NAV is about one standard deviation below the mean on a longer term basis. In the shorter term, the discount has actually narrowed somewhat since year end when many closed-end funds were relative bargains because of year-end tax loss selling.
BQR has only average liquidity and you need to be careful with large purchases.
BQR is attractively priced at current levels with the discount to net asset value at 13%. Because of the climate change publicity and discussions at Davos, we may see new money entering the water resources and new energy sectors in the next few years.
These sectors are depressed longer term and may be due for a comeback. Relative strength/momentum generally works for sector rotation using shorter time frames of three to six months. But for three to five year periods, research has shown that mean reversion often occurs and weaker sectors over a three to five year period often outperform better going forward.