Equity CEFs: Funds To Buy, Funds To Sell From The Major Fund Sponsors - Part II

|
Includes: BDJ, BME, BOE, BST, BUI, CII, IGA, SPY
by: Douglas Albo

Summary

Moving on to the next two major sponsors of equity CEFs, let's see how the BlackRock and Voya equity CEFs performed in 2015.

It was only a few years ago that the BlackRock and Voya (ex-ING) equity CEFs were trading at much narrower discounts to even premium valuations. Now, all that has changed.

As I predicted in 2011-2013, Eaton Vance and Nuveen were the place to be over BlackRock and Voya. But are there any opportunities now with the BlackRock or Voya funds?

The four best known sponsors of equity CEFs (not necessarily fixed-income CEFs) are Nuveen, BlackRock (NYSE:BLK), Eaton Vance (NYSE:EV) and Voya (NYSE:VOYA). NOTE: ING changed its name to Voya in April 2014.

In my last article, Funds To Buy, Funds To Sell From The Major Fund Sponsors, I focused on Eaton Vance and Nuveen, while in this article, I will focus on BlackRock and Voya. Let's start with BlackRock.

The BlackRock Equity CEFs

I believe BlackRock has some of the best valued equity CEFs available to investors primarily because BlackRock got started late in getting their distributions cut to more achievable NAV yields and thus, their funds are only just beginning to show better NAV growth and performance. Also as a result, investors are not fully appreciating the turnaround some of the funds are showing or should start to show.

Let's first go to the scoreboard and see how the BlackRock equity CEFs did in 2015 sorted by their total return NAV performance. Funds in green outperformed the S&P 500, as reflected by the SPDR S&P 500 Trust ETF (NYSEARCA:SPY), up 1.2% for 2015 including all quarterly dividends added back. NOTE: The most common quoted S&P 500 performance for 2015 was actually -0.7%, because the index does not include dividends.

Far and away, the strongest BlackRock equity CEF in 2015 was the Health Sciences Trust fund (NYSE:BME). BME has obviously been very profitable for long-term investors but I cannot endorse a fund that is this volatile at market price and trades consistently at a premium valuation. Investing in BME is a bit like gambling due to its volatility so you would have to time your investment very well and hope the healthcare and biotech sectors continue their strong outperformance. But after a $4.55/share capital gain distribution last month on top of its $0.20/share quarterly distribution, I'm not sure what this fund can do for an encore.

All of the BlackRock equity CEFs use an option-income strategy, selling individual stock options on a relatively low percentage (30% to 50%) of their overall portfolio positions. The best opportunities in the BlackRock equity CEFs, in my opinion, are away from their sector specific CEFs, which have either been big hits like BME or big misses like (NYSE:BCX) and (NYSE:BGR). That leaves the other funds to choose from.

Because I own a lot of the Eaton Vance option-income CEFs, which already include a heavy exposure in information technology and growth stocks, I favor the more value oriented diversified funds from BlackRock, like the Enhanced Equity Dividend Trust fund (NYSE:BDJ), $7.61 market price, $8.70 NAV, -12.5% discount, 7.4% current market yield, or the Global Opportunities Equity Trust (NYSE:BOE), $12.76 market price, $14.25 NAV, -10.5% discount, 9.1% current market yield.

BDJ and BOE are the largest of the BlackRock equity CEFs in terms of assets managed and both have financials as their largest sector exposure. Both funds went through rough patches after the financial crisis in 2008 when both were saddled with too high of an NAV yield (12%+) though a series of distribution cuts finally brought their NAV yields down to more manageable 6% to 8% levels.

Still, most investors lost confidence in the funds so I believe this is an opportunity to get ahead of the curve and invest in undervalued funds with wide discounts that may finally be able to show some distribution stability and NAV growth. BDJ is a mostly US based large-cap stock fund while BOE is a global fund with 48% of its large cap stock portfolio invested overseas, primarily in Europe.

I also like the two US based growth stock CEFs from BlackRock (NYSE:CII) and (NYSE:BST), though as I mentioned, both are going to be similar to the Eaton Vance option CEFs with information technology as their largest sector exposure. (NYSE:BUI) and (NYSE:BGY) I'm neutral on but either one could surprise to the upside if there is a change in sector leadership. For example, if utilities and energy MLPs start to draw interest as sector recovery stories in 2016, BUI should be a beneficiary. And if overseas markets In Asia and Europe outperform the US, something that didn't happen last year or going back even further, then BGY could be a beneficiary. But I wouldn't hold my breath on the last one happening.

The Voya Equity CEFs

No fund family has lost more panache in my opinion than the Voya funds as many are just a former shell of themselves in terms of assets. In fact, I hesitate to put Voya in the top four fund families anymore since they are not nearly as popular as they used to be.

The biggest reason for that is that virtually all of their funds are either international or mostly international, which hasn't been the place to be for quite some time. Then consider that most of their funds are still cutting distributions and the bottom line is that investors have essentially lost interest in the Voya equity CEFs and most trade at double-digit discounts. Here are the Voya equity CEF performances for 2015.

Like the BlackRock equity CEFs, the Voya equity CEFs all use a low option writing strategy and thus rely heavily on portfolio appreciation, something that hasn't been reliable for the past few years due to the weak overseas markets.

Of the group, the only fund I own is the Global Advantage and Premium Opportunity Fund (NYSE:IGA), $10.30 market price, $11.29 NAV, -8.8% discount, 10.9% current market yield (as of 1/4/2016). Frankly, it's the only fund I have a degree of confidence in while the others just have too much exposure to markets that are unreliable.

Perhaps some day that will change but trying to be a hero and pick when that occurs would have been futile over the last few years and it just seems safer to continue to go with what has been working in this group.

Conclusion

In my next article, I'll address some of the other equity CEF fund sponsors that are perhaps not as well known, such as Gabelli, Cohen & Steers and First Trust Advisors.

Disclosure: I am/we are long BOE, CII, BDJ, IGA, BUI, SPY.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.