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The BlackRock Innovation & Growth Trust (NYSE:BIGZ) is a closed-end fund that invests in companies recognized for their innovative products or services. The fund launched in early 2021 which proved to be unfortunate timing as shares have declined by 40% over the past year amid the broader market selloff and particular weakness in the fund's core exposure to high-growth tech names. That said, the fund looks interesting on the selloff considering its current 11% distribution yield and 10% discount to NAV. While the strategy remains high-risk into ongoing market headwinds, we see value in the underlying holdings which maintain a positive long-term outlook. We expect BIGZ to lead higher into improving market conditions going forward.
BlackRock
What is the BIGZ Fund?
BIGZ is relatively unique among CEFs considering its "thematic" investing strategy focusing on mid- and small-caps. In addition to its portfolio of stocks, the fund also holds about 20% of assets in private investments which represents an alternative asset class. Furthermore, BIGZ utilizes a call writing strategy that is intended to support the portfolio management process and, in theory, improve risk-adjusted returns. The fund is actively managed by BlackRock, Inc. (BLK), meaning it's not intended to track any index while all positions are at the discretion of the investment team.
The attraction of the innovation theme is the idea that companies with disruptive technology can generate strong growth and capture market share over legacy solutions. In some cases, the companies that represent target investments for BIGZ are emerging as leaders in completely new markets.
BlackRock
Within the current portfolio of 87 equity holdings, the innovation areas covered here include cloud computing, mobile payments, biotech, e-commerce, cybersecurity among other types of services. By sub-industry, software application names represent 31% of the fund, followed by semiconductor-related stocks at 11%.
The top current holdings include Bill.com Holdings, Inc. (BILL), Entegris, Inc. (ENTG), Axon Enterprise, Inc. (AXON), Monolithic Power Systems, Inc. (MPWR), Avalara, Inc. (AVLR), Globant, S.A. (GLOB), and Bio-Techne Corp. (TECH) which all have an approximate 3% weighting. The relatively low concentration among the top holdings in the fund gives importance to the smaller positions as a measure of diversification.
BlackRock
We mentioned private investments. These are typically pre-IPO companies that have raised capital through funding rounds. At the end of Q4 2021, BIGZ disclosed investments totaling $744 million, approximately 20% of the net assets at the time. Comments from management have noted an intention of reaching a target allocation to this segment of 25%. The challenge here is that these positions are not typically marked to market daily, so there is some uncertainty as to the value of the holdings. The understanding is that they are generally correlated to comparable publicly traded equities, although the inclusion here adds a layer of diversification to the fund.
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BIGZ Performance
We mentioned the fund's performance has been poor. Indeed, BIGZ has lost a cumulative 40% at its market price and 33% at NAV on a total return basis since the fund's inception. This goes back to what was likely extreme exuberance in the market during Q1 2021 with BIGZ launching near peak valuations for many high-growth tech names. Following a big second-half of 2020 where many companies got a boost of demand during the pandemic, results over the past year have been generally not been able to maintain the same momentum. Separately, the combination of elevated inflation and climbing interest rates have worked to pressure sentiment towards more speculative and momentum corners of the market.
Keep in mind that as a thematic fund, BIGZ is not necessarily expected to outperform a broad market index like the S&P 500 (SPY) in all environments, but instead, offer targeted exposure to a particular profile of companies.
Year to date, BIGZ's 20% decline has been more resilient compared to deeper losses from comparable "high-growth momentum tech funds" like the ARK Innovation ETF (ARKK), Renaissance IPO ETF (IPO), Goldman Sachs Future Tech Leaders ETF (GTEK), VanEck Vectors Social Sentiment ETF (BUZZ), and even the BlackRock Science and Technology Trust II (BSTZ) CEF which are all down by more than 25% in 2022. Each of the funds above has different strategies. Our point here is not to say that one fund is better than another, but simply to place BIGZ's performance in context.
BIGZ Dividend
BIGZ stands out with its distribution yield of 11% at the current market price based on a monthly payout of $0.10. Over the past year, 100% of the distribution has been in the form of the return of capital (ROC), which is not based on realized gains or underlying dividend income. ROC is untaxed to investors but works to reduce the original cost basis of shares, effectively deferring the tax liability until the position is ultimately sold. Some CEF investors appreciate ROC for its potential tax-efficiency strategies.
There is a legitimate question if the dividend is at risk of being cut considering the decline in the net asset value over the past year. The distribution represents an annualized cash payment of $290 million to shareholders compared to approximately $2.9 billion in AUM, down from a peak level closer to $5 billion. Our take is that the payout is likely sustainable this year but would likely need to be "adjusted lower" if market conditions don't improve going forward. It's fair to assume that when the fund launched with a yield closer to 6%, the strategy did not anticipate this type of action.
The challenge is that the monthly payout at this size ends up holding back the performance of the fund on a potential rally because BIGZ is forced to trade out of positions to fund the distribution while the cash would likely be better served reinvesting into new opportunities or averaging down on holdings. The Q1 shareholder update will be important to see any guidance in this regard; we can also look forward to updates on the private investments and their valuations.
BIGZ Price Forecast
Getting bullish on this segment of high-growth tech is a difficult call considering it's been a falling knife. That said, we believe there is room at the current level to start accumulating shares for a long-term holding. The potential for a turnaround coupled with the compelling yield on the fund as an income opportunity can generate strong returns going forward.
Seeking Alpha
The market will need some clarity on a resolution for the Russia-Ukraine crisis to regain positive sentiment and break out higher. The surge of commodity prices including oil has added to concerns that the macro conditions can weaken and pressure broader economic activity. This remains the key risk to watch that can open the door for another leg lower in the market.
The upside for BIGZ is a sense that the selloff has likely already priced in some of the worst-case scenarios while helping to balance the valuation. Among the top holdings of the fund, the takeaway is that most are expected to generate impressive growth this year and are currently profitable. Getting past the near-term headwinds, these companies are well-positioned to recover.
| Top 10 Holdings BIGZ - Consensus Estimates | ||
| 2022 Sales Growth y/y | FWD PE | |
| Bill.com Holdings, Inc. (BILL) | 149% | n/a |
| Entegris, Inc. (ENTG) | 17% | 30x |
| Axon Enterprise, Inc. (AXON) | 21% | 67x |
| Monolithic Power Systems, Inc. (MPWR) | 28% | 42x |
| Avalara, Inc. (AVLR) | 22% | n/a |
| Globant S.A. (GLOB) | 36% | 45x |
| Bio-Techne Corp. (TECH) | 18% | 53x |
| Phreesia, Inc. (PHR) | 42% | n/a |
| Five9, Inc. (FIVN) | 24% | 81x |
| Paylocity Holding Corp. (PCTY) | 31% | 73x |
Source: Seeking Alpha
There is a case to be made that tech stocks and software application names are going to be relatively less exposed to inflationary cost pressures. We can also argue that the ongoing geopolitical issues causing supply chain disruptions can end up being positive for the long-term outlook of innovative technologies within the underlying holdings of BIGZ.
Final Thoughts
We rate BIGZ as a Buy with an expectation that improving conditions going forward and more positive sentiment towards risk assets can allow this one to trade higher over the next several months. The combination of high-yield and exposure to high-growth stocks is unique in the market. Despite the fund's early history of shortcomings, the strategy can end up outperforming going forward.
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