This article was first released to subscribers of CEF/ETF Income Laboratory 1-month ago.
In our latest monthly "Chemist's Quality Closed-End Fund Report: February 2019", BlackRock Floating Rate Income Trust (BGT) emerged as the top-ranked D x Y x Z "quality" fund.
According to the fund's website, the primary investment objective of the fund is "to provide a high level of current income", with a secondary objective of "the preservation of capital".
The investment mandate of the fund is reproduced below:
The Trust seeks to achieve its investment objectives by investing primarily, under normal conditions, at least 80% of its assets in floating and variable rate instruments of US and non-US issuers, including a substantial portion of its assets in global floating and variable rate securities including senior secured floating rate loans made to corporate and other business entities. Under normal market conditions, the Trust expects that the average effective duration of its portfolio will be no more than 1.5 years. The Trust may invest directly in such securities or synthetically through the use of derivatives.
Let's take a look under the hood of this closed-end fund to see what it's about!
The fund was incepted on August 30, 2004, and holds $326 million in net assets. It uses 28% leverage and charges a baseline expense ratio of 1.20% (the website lists the management fee as 1.07%).
Allocation wise, BGT is a pretty much "pure-play" senior loan fund with 96.52% of the portfolio in loans, 2.36% are in CLOs while 2.30% are in equity/equity futures. The fund has 438 holdings.
The sector breakdown of BGT is shown below, led by technology (18.90%), consumer non-cyclical (18.11%), and consumer cyclical (16.72%).
As expected, the vast majority (~95%) of the portfolio is in non-investment-grade issues.
The fund has an effective duration of 0.17 years, meaning that it is very effectively insulated from the effect of changing interest rates.
The fund's current -12.81% discount looks attractive compared to its 1-, 3-, and 5-year average discounts of -8.66%, -5.93%, and -6.86%, respectively. The 1-year z-score of -1.5 indicates that it is moderately undervalued compared to its recent historical average.
As can be seen from the chart below, the current discount of -12.81% has only been briefly touched a few times since the Great Financial Crisis. This suggests that the current valuation is an attractive entry point for the fund.
BGT yields 6.13% at market price or 5.34% on NAV due to its -12.81% discount.
Turning to the financial statements, the fund's net investment income last year of $0.76 was the highest since 2015, which probably reflects the increased income that senior loans receive when short-term rates rise. Using last year's numbers, the coverage ratio is 107% ($0.76 of NII against $0.71 of distributions).
It is also pleasing to see that BGT's NAV has basically remained steady over the past 5 years, falling only marginally from $14.57 at the end of 2014 to $14.33 last year. Of course, this figure was before December's mini-crisis in loan values. The current NAV stands at $13.90.
Looking at the distribution history of the fund suggests that the managers like to keep distributions aligned with earnings by periodically adjusting the dividend rate.
A further factor that contributes to BGT's good coverage is its low baseline expense ratio of 1.21%, which is third-lowest out of the peer group.
Here's the entire universe of senior loan funds for your consideration, arranged in order of 1-year NAV performance. BGT falls in the upper half of the pack, ranking 12th out of 29 funds at +6.67%.
(Source: Stanford Chemist, CEFConnect)
Notably, BGT's price has lagged its NAV by -8.22% over the past year, which is lowest out of the peer group.
Data by YCharts
Over longer time frames, BGT is ranked 23rd out of 25 funds at 3 years, 9th out of 25 funds at 5 years, and 13th out of 16 funds over 10 years. Hence, BGT is neither a serial outperformer nor an underperformer.
Overall, BGT is a very standard senior loan fund run by BlackRock, one of the largest CEF managers. While not as exciting or exotic as CLO funds or those with "dynamic" mandates, I don't think an investor can go too wrong with picking up some BGT for senior loan exposure at the current fairly attractive valuation, with good dividend coverage to boot. Finally, the low expense ratio is a definite plus.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.