- The shareholder friendly move to monthly distributions could increase investor interest and narrow discounts.
- Many BlackRock equity option closed end funds have high yields and large discounts but group performance has disappointed.
- Equity option funds generate income and reduce volatility. These are attractive traits in the current low yield environment.
Many individual investors purchase closed end funds for their stable, large distributions. Individual investors often prefer more frequent distributions to better manage monthly cash flows. On June 16th, BlackRock (NYSE:BLK) took a step to cater to individual investors, changing from a quarterly distribution to a monthly distribution for their equity option CEFs. Eleven funds will be affected by this change. Many of these funds have traded at a wide discount to NAV. This change can be seen as a shareholder friendly attempt to narrow the discounts on these funds. The updated distributions are expected to be announced in August or September.
Source: Morningstar as of 5/31/2014
Options strategies can be used to increase income and reduce volatility. Many of BlackRock's equity option funds have underperformed the market. This could be caused by the options overly reducing the upside potential of holdings in a market that seems to go straight up. If the market suffers a pullback, or volatility increases these option strategy funds could show their value. Investors' search for income have driven shares of some of these funds higher due to their large distributions.
The BlackRock Enhanced Equity Dividend Trust (NYSE:BDJ) and BlackRock Enhanced Capital and Income Fund, Inc. (NYSE:CII) invest in domestic value stocks while using an options overlay strategy. These funds have seen big runs in their price YTD and discounts have closed, especially for CII. Long-term performance hasn't kept up with the SPDR S&P 500 (NYSEARCA:SPY), but shouldn't be expected to in the strong market run up we have seen. These funds could be interesting long-term holdings but with high z-statistics it might be prudent to wait for a more attractive value.
The BlackRock Dividend Income Trust (NYSEMKT:BQY) and BlackRock Global Opportunities Equity Trust (NYSE:BOE) invest in global equities with an options overlay. These funds have also trailed the SPY. BOE's discount has narrowed this year and is currently trading well above the recent average discount. BQY however, still offers a 10.46% discount and is trading close to its 1-year average discount. BQY could be an interesting investment at these levels.
The BlackRock International Growth and Income Trust (NYSE:BGY) invests in international stocks with an options overlay. BGY has seen weak performance YTD and over longer time periods. However, due to its large distribution it has seen investor interest this year narrowing the discount to NAV. You can find an in depth profile on this fund here.
The BlackRock Real Asset Equity Trust (NYSE:BCF) and BlackRock Resources & Commodities Strategy Trust (NYSE:BCX) invest in natural resources and commodities equities while using an options overlay strategy. These funds have weak 3-year track records but have seen a strong start to 2014 as energy and materials stocks have rebounded. The funds offer double-digit discounts to NAV and distributions over 7%.
The BlackRock Energy and Resources Trust (NYSE:BGR) appears to be a solid fund that could warrant more research. BGR invests in energy equities while using an options overlay strategy. Returns could benefit from rising oil prices and increased productivity of energy companies. The double-digit discount to NAV adds to its attractiveness.
The BlackRock Health Sciences Trust (NYSE:BME) invests in healthcare stocks. Healthcare has been an attractive area to be invested in recent years. Returns have been strong but the discount to NAV is very narrow and the yield is not attractive at these levels.
The BlackRock EcoSolutions Investment Trust (NYSE:BQR) invests in new energy, water resources, and agriculture. There are many story stocks in this space but overall the fund's performance has been disappointing. The fund does offer an 8.69% distribution and a double-digit discount so could be worth watching to see if management is able to turn performance around.
The BlackRock Utility and Infrastructure Trust (NYSE:BUI) has seen strong returns this year. BUI's NAV has benefited from a strong market for utilities and infrastructure stocks. The fund's discount to NAV has also narrowed driving double-digit returns this year. An in depth profile on this fund is available here.
BlackRock's decision to change to a monthly distribution for its equity option closed end funds is a shareholder friendly event. This change could be a catalyst for closing the large discounts on some of the affected funds. BGR and BQY look particularly interesting at this point and could justify additional research.