Suggestions For Blackrock After Discussion With Chairman
Summary
- Blackrock is the world's largest asset manager.
- Some of its municipal closed-end funds are selling at larger discounts than the average municipal closed-end fund at the depth of the market meltdown in 2008.
- This results in what I perceive as an uncommon value for various Blackrock municipal closed-end funds, especially if Blackrock or an activist implements measures to shrink the discount to NAV.
Blackrock Inc. (BLK) is the world's largest asset manager with $6.3 trillion in assets under management as of December 2017. It is the beneficiary of a massive rush by investors to place their money in passive investments, rather than traditional actively managed mutual funds. Despite this, they are looking more and more like the Rodney Dangerfield (no respect) of the closed-end world and ironically it isn't because of bad closed-end fund performance.
I recently bought a pair of Blackrock NJ municipal closed-end funds which are selling at discounts to NAV of greater than the 12% average discount to NAV of municipal closed-end funds at the depth of the market meltdown in 2008. I agree with Baron Rothschild that "the time to buy is when there's blood in the streets." With all the fear about rates soaring and the 10 year U.S. Treasury yield rosing from 2.41% to 3.00% YTD, the MUB iShares National Muni Bond ETF has dropped just .79% YTD.
These Blackrock municipal closed-end funds are the old high quality Merrill Lynch ones with an excellent short to long-term track record. They are now owned by Blackrock. BlackRock Muni Holdings NJ Quality Fund (NYSE:MUJ) and Blackrock Muni Yield New Jersey Fund (MYJ) are the worst performing NJ municipal closed-end funds in terms of market return % YTD (down 7.70 and 12.65%). They are doing just fine vs their peers on a NAV basis. After two of these NJ municipal closed-end funds shown below from Eaton Vance are merged out of existence, there will be only four NJ municipal closed-end funds to choose from. MYJ is down about 1.6% so far this week based on market price while its NAV is down just .13%. This is far worse than MUJ and the other NJ municipal closed-end funds. I suspect MYJ may have been hit hard this week in anticipation of a distribution cut for August which did not happen.
CLOSED-END FUNDS: NJ Muni Debt Funds as reported by The Wall Street Journal
Wednesday, August 1, 2018. | ||||||||
Weekly Statistics(as of 7/27/2018) | Daily Statistics(as of 8/01/2018) | |||||||
Fund | NAV | Mkt Price | Prem/Disc % | NAV | Mkt Price | Prem/Disc % | 52 WeekMarket Return % | |
15.29 | 12.97 | -15.17 | 15.28 | 12.91 | -15.51 | -7.70 | ||
BlackRock MuniYld NJ (NYSE:MYJ) | 15.58 | 13.67 | -12.26 | 15.57 | 13.45 | -13.62 | -12.65 | |
13.95 | 12.06 | -13.55 | 13.92 | 11.98 | -13.94 | -3.91 | ||
13.43 | 11.76 | -12.43 | 13.40 | 11.70 | -12.69 | 0.46 | ||
15.19 | 12.94 | -14.81 | 15.16 | 12.95 | -14.58 | -6.53 | ||
15.49 | 13.04 | -15.82 | 15.45 | 12.98 | -15.99 | -1.22 | ||
MYJ has gone full circle from selling at a premium of 5% last year to a current 13.62% discount. YTD it is down 11.82% based on market value and up .43% based on NAV. Over the past year, it is down 14.13% based on market value and up 3.58% based on NAV. It has about 94% of its $626 Million in managed assets in investment-grade municipal bonds, a 5.37% distribution rate and a 10.70% tax-equivalent yield, and an effective duration of 8.67 years. Top sectors are conservative and include Transportation (23%), State Tax-Backed (14%), Local Tax-Backed (14%), and Prerefund/Escrow 14%.
Premium/Discount Information
As of 7/31/2018
| 6 Month | -9.87% |
| 1 Year | -4.54% |
| 3 Year | -2.35% |
| 5 Year | -4.81% |
Z-Score
As of 8/1/2018
| 3 Month | -2.50 |
| 6 Month | -1.60 |
| 1 Year | -1.50 |
Above charts from CEFConnect
For a look at institutional holders of MYJ by size, click here.
MUJ is is currently selling at a 15.51% discount to NAV. It has just about 100% of its managed assets of $761 Million in investment-grade bonds, a 4.88% distribution rate and 9.72% tax equivalent yield, and an effective duration of 9.92 years. Top sectors are conservative and include State Tax-Backed (22%), Transportation (21%), Education 16%, Prerefund/Escrow (12%), and Local Tax-Backed (12%).
Premium/Discount Information
As of 7/31/2018
| 6 Month | -12.88% |
| 1 Year | -10.15% |
| 3 Year | -8.21% |
| 5 Year | -8.90% |
Z-Score
As of 8/1/2018
| 3 Month | -1.90 |
| 6 Month | -2.40 |
| 1 Year | -1.80 |
Above charts from CEFConnect
For a look at institutional holders of MUJ by size and amount, click here.
The chart below shows MUJ has the 9th widest discount to NAV among all municipal closed-end funds. Four of the top nine widest discounts to NAV are from Blackrock managed closed-end funds. The info below is from Morningstar data.
| Fund Name | Premiums/ | Market | NAV | Avg Daily | Net | Manager | |
| Discounts | Return | Return | Volume | Assets | Tenure | ||
| YTD | YTD | Shares | $mil | ||||
| MFS® California Municipal Fund (CCA) | -16.01 | -8.73 | -0.85 |
| 34 | 11.2 | |
| Neuberger Berman NY Intermediate Muni (NBO) | -15.97 | -2.89 | -0.13 | 15,659 | 70 | 10.5 | |
| Nuveen NJ Quality Muni Inc (NXJ) | -15.96 | -2.07 | -0.16 |
| 657 | 7.7 | |
| BlackRock Muni NY Intermed. Duration (MNE) | -15.95 | -5.4 | -0.58 |
| 63 | 12.7 | |
| Neuberger Berman CA Inter Muni (NBW) | -15.87 | -5.61 | 0.25 | 20,811 | 83 | 10.5 | |
| EV CA Municipal Income (CEV) | -15.83 | -4.29 | -0.92 |
| 98 | 4.6 | |
| Nuveen MI Quality Muni Inc (NUM) | -15.81 | -2.43 | -0.7 |
| 311 | 10.8 | |
| BlackRock NY Municipal Bond (BQH) | -15.8 | -9.37 | -1.31 |
| 43 | 11.8 | |
| BlackRock MuniHoldings NJ Qty (MUJ) | -15.58 | -8.08 | -0.03 |
| 461 | 12.7 |
I attended the Blackrock closed-end fund proxy vote meeting on Monday and spoke with its Chairman of the Board of Directors of Blackrock closed-end funds during the meeting for 15 minutes or so. I expressed my dissatisfaction at the market performance of my MUJ and MYJ vs. their performance at NAV. He indicated he and others at Blackrock also feel the pain with the large discounts. I presented him with a 3 page document that shows among other things some of my suggestions for narrowing the discounts to NAV. He said it would be reviewed and someone from Blackrock would get back to me on it. A managing director from Blackrock came up to me after the meeting and thanked me for my suggestions and confirmed Blackrock would review my comments and get back to me. The Chairman said Blackrock wants larger funds which helps with liquidity and can help with trading. Someone from Blackrock in the audience said the average municipal closed-end fund has a 9.5% discount to NAV. I said their MUJ has a 15+% discount to NAV. I stressed at the meeting that if Blackrock leaves things status quo with MUJ and MYJ, it wouldn't surprise me if some activist scoops up perhaps 10% of their shares and then gets a few board seats. The Chairman said board members are elected and he understands. He said the discounts are a problem for him personally.
Some of the ways Blackrock (and others) can reduce wide discounts to NAV are as follows:
1) Buy back shares of the closed-end fund in the open market. Blackrock has done this in the past with other closed-end funds and other closed-end fund groups have as well. Closed-end fund managers are often hesitant to do this because the assets in a fund, which are directly tied to the number of shares outstanding, impact management fees. The more assets the more a management company gets paid for running a fund's portfolio. So, for a closed-end fund, there's little reason to make the asset base smaller by willingly shrinking the fund. Shares could even be bought back based on discount to NAV which activist investor Phil Goldstein even does with his Special Opportunities Fund (SPE). I believe long-standing funds like SPE with an established buyback policy is very positive.
2) Convert the closed-end fund into an open-end fund and watch the discount to NAV disappear. This would be great for the investors in the closed-end funds but would result in less profits on less assets under management for the closed-end fund.
3) Merge closed-end funds. The Chairman said mergers can make sense. Someone from Blackrock in the audience spoke about the merger of BLJ and BNJ into MYJ among NJ muni closed end funds. I mentioned holders of the merged funds saw their discount widen a lot, from 8% and it is now at nearly 14%.
4) Merge closed-end funds in a way that should narrow the discount to NAV. Blackrock competitor Eaton Vance came up with a win win way of merging closed-end funds. Its Eaton Vance NJ Municipal Income Fund (EVJ) I own rose about 5% since the announcement on 7/26 while EVJ competitors at Blackrock MYJ is down about 1% and MUJ is down about .5%. The way Eaton Vance explained things to me assuming this is approved (I don't see why shareholders won't approve it), shares of EVJ would be exchanged for shares of the Eaton Vance Municipal Income Fund (EVN) at the then discount to NAV of EVN. National muni funds are of interest to a larger audience and often have a smaller discount to NAV plus there is a certain amount of fear about NJ finances. EVJ prior to this announcement was trading at a discount to NAV of almost 17%. EVN is trading at a discount to NAV of 8.97% which if it holds steady when the deal is done would mean an 8% smaller discount for EVJ shareholders. If Blackrock does something similar, it will mean they should be able to keep activists away from the funds involved and its closed end fund client base will be happier which should result in more Blackrock closed end fund (and other assets) thus fees for Blackrock.
Here are some Blackrock municipal closed end funds that if MYJ and MUJ are merged into, could result in a discount narrowing of up to 10-13%. This should please everyone from the Chairman to other investors in MYJ and MUJ.
CLOSED-END FUNDS: Gen & Ins Leveraged | ||||||||
| Wednesday, August 1, 2018 | ||||||||
| Weekly Statistics | Daily Statistics | |||||||
| (as of 7/27/2018) | (as of 8/01/2018) | |||||||
| Fund | NAV | Mkt Price | Prem/Disc % | NAV | Mkt Price | Prem/Disc % | 52 Week | |
| Market Return % | ||||||||
| BlackRock Muni Inc Inv (BBF) | 13.87 | 13.38 | -3.55 | 13.87 | 13.46 | -2.96 | -6.98 | |
| BlackRock MuniHoldings (MHD) | 16.52 | 15.6 | -5.57 | 16.52 | 15.62 | -5.45 | -8.42 | |
| BlackRock MuniVest II (MVT) | 14.81 | 14.05 | -5.13 | 14.81 | 14 | -5.47 | -6.72 | |
| BlackRock MunYld Inv (MYF) | 14.29 | 13.65 | -4.48 | 14.29 | 13.59 | -4.9 | -9.47 | |
5) Do nothing and some activist could buy a 10% stake in the closed end fund and get a few board seats and find ways to minimize or eliminate the discount to net asset value. Activists are smart and know how to spot a bargain. Sometimes what they force goes well beyond a buyback, including such things as liquidation and changing to open-end status.
The market price of MUJ got hit extra hard by 2 drops in the monthly distribution rate so far this year. Its latest drop in distribution rate resulted in a quick 3% drop in its market price so I scooped up a lot of these shares on sale. A single but larger drop in the distribution rate for a closed-end fund likely would mean you'd only have one big drop in the discount to NAV to recover from.
Prudent fund management at Blackrock meant that both MUJ and MYJ dropped far less than their peers in 2008 which was important to me. They were smart enough to keep away from Puerto Rico municipal bonds prior to their huge price declines. MUJ is in the 40 percentile YTD, 40 percentile for 1 and 3 years, and 20 percentile for 5 years. It dropped just 19.46% at market price and 8.03% at NAV in 2008. MYJ is in the 20 percentile YTD, 20 percentile for 3 years, and 1 percentile for 5 and 10 years. I consider Blackrock the Rolls Royce of investment companies. They have a few wheels loose so to speak with their closed-end funds and some of my suggestions above (especially emulating what Eaton Vance did) could be just what the doctor ordered.
This article was written by
Analyst’s Disclosure: I am/we are long MUJ, MYJ, AND EVJ. 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.
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