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  • Is BKN Worth The 3.1% PREMIUM Over NAV? In Short: NO !! 1 comment
    Jan 14, 2014 3:57 PM | about stocks: BKN

    Muni Closed End Funds (NYSEMKT:CEF) have rallied nicely from the tax selling before the end of 2013 during December.

    Some funds had been trading at discount to their Net Asset Values (NYSE:NAV) of around 10%, which is quite higher than the long term average.

    Many of the funds we saw trading at premium to NAV until the summer of 2013 turned south during the summer months and reversed course to end the year with a very steep NEGATIVE total return, spooked by the general malaise in the fixed income market following the Fed's infamous "Taper Tantrum" as well as some negative headlines emanating from Detroit and more importantly Puerto Rico (PR).

    December enabled investor to grab Muni CEF at yields in excess of 7% (TAX FREE) and as a bonus, to get them at very high historical discounts to their NAV.

    While some funds still trade at discounts to their NAV's (admittedly, smaller ones but still in excess of 5% discount), other funds, that were mentioned in publications and interviews like this one : blogs.barrons.com/focusonfunds/2013/12/17/kass-likes-muni-cefs-attractive-upside-and-limited-downside/, enjoyed a terrific rally that pushed them from undervalued terrain all the way to over-valued valuation with market prices exceeding NAV's handsomely.

    Herein lies the conundrum; BKN is one of those funds and my research tells me there is no fundamental reason for it to differ from other funds in the same arena managed by Blackrock, and for that matter, other funds managed by other well known and respectable fund management companies (Nuveen, Eaton Vance, Invesco etc.).

    At yesterday's close BKN was at a 3.15% PREMIUM to its NAV while yielding about 6.52%.

    Looking at its average valuation of the past 3 and 5 years BKN has been trading at Premiums of 2.35% and 2.02% on average, respectively.

    Looking at a few of the other Blackrock managed funds like BYM,MHD,MQT,BTA just to name a few we see a very stark difference in relative valuations vs. BKN:

    All of these funds (and many more by other managers, the list is too long to place here, but a screen of CEF will uncover those opportunities) offer much better fundamentals than BKN:

    1) Higher dividend payouts , to the tune of 7%-7.15% (vs. just 6.52% in BKN)

    2) Better pricing - those funds (and again, many others) trade at significant discounts to their NAV's to the tune of 5.5% to 7.7% DISCOUNTS.

    3) Much better relative valuations : While BKN trades ABOVE its 3 and 5 years average valuation, these funds trade WELL BELOW their 3 and 5 year average valuations to the tune of anywhere from 4% to 6.5% BELOW their average valuation.

    To sum it up - one can get about 0.60% better yield AND about 8.6% to 10..8% difference in Premium vs. Discount AND about 5% to 7.5% in Relative valuation by selling BKN and swapping into other Muni CEF's that are much more reasonably valued and would provide a much better return going forward should reversion to the mean occurs.

    The best part is that you are not changing even fund managers by staying with Blackrock managed funds (although you can choose other fund families with similar superior characteristics as well)

    Disclosure: I am short BKN.

    Additional disclosure: I am long a host of Muni CEF's some of which were highlighted in this post.

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  • NYer1
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    Author’s reply » Since 1/14/14 BKN generated a NEGATIVE total return of about -3.86% while the other 4 Blackrock funds mentioned in my Instablog (BYM,MHD,MQT,BTA) were UP a total return of : +3.35% , +4.17%,, +3.65% and +2.98 , respectively.
    So while BKN has lost its unjustified premium (probably due to the Barron's mention discussed above) and reverted to trade at a discount, the other 4 funds have shrunk their own discounts and coupled with a higher yield managed to generate an average total return of about +3.54%.
    That is a difference of some 7.4% over a period of just about 7 1/2 weeks.
    I used today's weakness to cover part of my short on BKN.
    7 Mar 2014, 05:24 PM Reply Like
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