BCX: Diversified Commodities CEF, Strong 5.2% Distribution Yield, Subpar Returns
- A reader asked for my thoughts on BCX.
- BCX is a diversified energy, resources, and commodities CEF.
- BCX provides investors with a solid inflation hedge, and yields 5.2% to boot.
- On a more negative note, it has underperformed since inception.
- An overview of the fund follows.
- This idea was discussed in more depth with members of my private investing community, CEF/ETF Income Laboratory. Learn More »
The BlackRock Resources & Commodities Strategy Trust (NYSE:BCX) is a diversified energy, resources, and commodities CEF.
BCX has a solid investment thesis: it offers investors diversified holdings, is an effective inflation hedge, yields 5.2%, and trades with a 3.0% discount to NAV. Capital gains should be quite high if inflation continues to increase, investors get a solid 5.2% yield either way.
BCX's investment thesis is quite strong.
In theory at least.
In practice, the fund consistently underperforms all relevant indexes due to subpar security selection, industry positioning, and the like. Negative alpha, basically. BCX's performance is much worse than is to be expected from a fund with its holdings, strategy, and yield.
BCX seems like a fantastic investment, but the consistent underperformance is a deal-breaker for me. As such, I would not be investing in BCX at the present time.
BCX - Basics
- Sponsor: BlackRock
- Distribution Yield: 5.18%
- Expense Ratio: 1.09%
- Total Returns CAGR 10Y: 2.08%
BCX - Overview
BCX is an actively-managed diversified energy, resources, and commodities CEF. The fund provides investors with exposure to these industries in roughly equal measure, although it is slightly overweight energy.
(Source: BCX Corporate Website)
BCX is something of a global fund, with investments in North America, Europe, and Latin America. It does lack true global diversification, and doesn't invest in all relevant regions and countries. BCX focuses on U.S. equities, due to the strength and size of the country's economy. I was unable to find updated regional/country weights, as the information provided by fund management seems to be (materially) outdated.
BCX's holdings themselves are quite concentrated. The fund invests in just 45 companies, and the top ten of these comprise 45% of the value of the fund.
(Source: BCX Corporate Website)
BCX's highly concentrated holdings increase portfolio risk and volatility, and could lead to significant shareholder losses and underperformance.
Concentration is particularly impactful for actively-managed funds, including BCX. In simple terms, BCX's management team is picking 5-10 stocks to focus on, and returns basically depend on the performance of these stocks. Returns could be sky-high or rock-bottom, and there is no guarantee that the fund's performance will (roughly) track that of applicable indexes.
As an example, BCX's largest holding is Vale (VALE), a Brazilian mining company, focusing on iron ore. Vale is a reasonably large, diversified company, with operations in dozens of countries and a $96B market cap. Vale is also a rather niche company, and one which is rarely included in most relevant equity indexes. BCX's managers decided to (massively) overweight Vale, as they were bullish on iron ore prices in prior months.
BCX's performance is strongly dependent on the performance of Vale and its other larger holdings, on both an absolute and relative basis. More broadly, BCX's performance is strongly dependent on management decisions, capabilities, and execution. If BCX's managers are right to be bullish about iron ore prices today, and if they are right about future investment calls, then BCX should outperform.
Vale itself has significantly outperformed for the past year or so, on the back of higher iron ore prices. BCX's managers were right, about this call at least.
BCX is an unleveraged CEF. As many CEFs are leveraged, thought to mention that this was not the case for BCX.
As a final point, BCX sells covered calls on some of its holdings, currently 1/3 of these. Selling calls generates income while reducing potential capital gains, and tends to be a profitable strategy when markets move down or sideways.
BCX's strategy and holdings have several important positives and negatives for shareholders. Let's have a quick look at each of these.
BCX - Positives
Moderately Effective Inflation Hedge
BCX's holdings are all strongly exposed to commodity prices and inflation. Expect strong revenue, earnings, and share price growth as inflation increases.
BCX's diversified holdings provide the fund with, well-diversified exposure to commodity prices, and broader inflation measures.
Vale, the fund's largest holding, focuses on iron ore mining, and so is strongly exposed to iron ore prices.
BCX's energy holdings, including TotalEnergies (TTE), Chevron (CVX), and Royal Dutch Shell (RDS.A) (RDS.B), focus on producing and refining oil, and so are strongly exposed to oil prices.
BCX's other holdings have exposure to different commodities. CF Industries (CF) and Nutrien (NTR) focus on fertilizer and other agricultural inputs. Glencore (OTCPK:GLCNF) has diversified mining operations. FMC (FMC) focuses on pesticides. And so on and so on.
BCX's diversified energy, resources, and commodities holdings provide investors with a moderately effective inflation hedge. Returns should be high during periods of rising inflation. In theory at least.
Lots of investors are looking for inflation hedges, and I think BCX delivers on that front.
Strong 5.2% Distribution Yield
BCX offers investors a strong 5.2% distribution yield. BCX's yield is quite high, and much higher than that of broader equity, commodities, or energy index ETFs:
I was unable to find information detailing the sources of BCX's distributions. I am, however, confident that the fund's distributions are (mostly) funded through underlying net investment income and option premiums.
In any case, BCX's strong distribution yield is a significant benefit for the fund and its shareholders, and a key part of the fund's investment thesis.
Strong Potential Long-Term Returns
BCX is an equity fund, and so long-term returns are potentially quite strong.
Most funds with more direct inflation exposure, including the Invesco DB Commodity Index Tracking ETF (DBC), the Quadratic Interest Rate Volatility and Inflation Hedge ETF (IVOL), or the Vanguard Short-Term Inflation-Protected Securities ETF (VTIP) focus on assets with comparatively low expected long-term returns, and so will almost certainly underperform in the very long-term.
BCX is one of the few funds offering investors an effective inflation hedge with strong potential long-term returns, a solid combination.
Small 3.0% Discount to NAV
Finally, BCX currently trades with a 3.0% discount to NAV. Discounts are almost always a benefit for a fund and its shareholders, so BCX's (small) discount is a (small) benefit.
BCX - Negatives
BCX seems like a strong investment opportunity. It is an effective inflation hedge, has a strong 5.2% distribution yield, even stronger potential total returns, and a discount to NAV.
I've been searching for a fund with these characteristics for quite a while, as the overall investment thesis seems quite strong, and I'm sure it is something that would be very appealing to many readers and subscribers.
BCX seems to be just what I've been looking for, but it has one key negative and drawback.
Disastrous Long-Term Returns - Consistent Underperformance
BCX's most significant drawbacks is the fund's disastrous long-term returns and consistent underperformance. The fund was created more than ten years ago, and yet total returns are barely positive, and indistinguishable from zero.
BCX has significantly underperformed both U.S. and global equity indexes, since inception, and for most relevant time periods too. The difference in performance is stark.
BCX's underperformance is partly, but only partly, explained by the fund's underlying holdings, industry and country focuses. Meaning, the fund also generally underperforms U.S. and global energy and materials indexes.
BCX's holdings are so diversified that there is no one index that can serve as a benchmark, but a 50% global energy + 50% global materials allocation would make sense. From the above, these have returned 105% NAV since inception, versus 11.71% for BCX.
BCX has significantly underperformed since inception, and by a staggering amount.
BCX's significant underperformance has plummeted both NAVs and share prices. Both are down by about 50% since inception, although these have stabilized since 2019.
BCX's distributions are mostly funded through selling covered calls. Lower NAVs means fewer assets from which the fund can sell covered calls, which means fewer calls sold, which means lower distributions. BCX's distributions have gone down by about 60% since inception, or an 11% CAGR for the same.
(Source: Seeking Alpha)
These are all self-evidently disastrous results, and make a bullish rating or opinion impossible. I love the fund's strategy and holdings, but the performance is just not there.
As an aside, BCX's results are even worse considering the fund's covered call strategy. Remember, selling covered calls is generally a profitable strategy when markets move sideways or down. BCX's holdings have mostly moved sideways, so the calls should have been profitable. Management says the same:
The Trust utilized an options overlay strategy in which calls are written on a portion of the portfolio’s holdings. The Trust’s option writing strategy contributed positively to relative performance for the 12-month period.
(Source: BCX Annual Report)
BCX's disastrous results were mostly the product of unsuccessful investment picks and strategies. From what I've seen, no specific pick or strategy seems to be responsible for the underperformance. It was simply a case of most of the fund's holdings moderately underperforming. As an example, the fund had a relatively large investment in BP (BP) in 2020, and the stock moderately underperformed for the year.
Consistently pick underperformers like BP, and the fund should significantly underperform most relevant equity indexes, as has been the case since inception.
I like the fund, its strategy and value proposition, but consistent underperformance is a deal-breaker for me.
There is obviously no guarantee that the fund will continue to underperform, even though that has been the case since inception. BCX's managers could start to make more profitable investment decisions in the coming months, as they did with Vale. I wouldn't bet on it, especially not considering the fund's consistent long-term underperformance, but investment strategies and market conditions do change, and sometimes for the better.
Conclusion - Avoid
BCX consistently underperforms most relevant equity indexes, leading to plummeting NAVs and distributions. As is, I would avoid an investment in the fund at the present time.
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This article was written by
Juan has previously worked as a fixed income trader, financial analyst, operations analyst, and economics professor in Canada and Colombia. He has hands-on experience analyzing, trading, and negotiating fixed-income securities, including bonds, money markets, and interbank trade financing, across markets and currencies. He focuses on dividend, bond, and income funds, with a strong focus on ETFs, and enjoys researching strategies for income investors to increase their returns while lowering risk.
I provide my work regularly to CEF/ETF Income Laboratory with articles that have an exclusivity period, this is noted in such articles. CEF/ETF Income Laboratory is a Marketplace Service provided by Stanford Chemist, right here on Seeking Alpha.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.
This article was originally published to members of the CEF/ETF Income Laboratory on July 29th, 2021.
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