BCX: At A 11% Discount To NAV, This CEF Seems Undervalued

Coal Workers Union Pickets Outside BlackRock Investors In New York City

Spencer Platt/Getty Images News

BlackRock Resources & Commodities Strategy Trust (NYSE:BCX) is a closed-end fund that has two objectives: 1) seek high current income and current gains and 2) capital appreciation. If you chase after #2, this tends to come at the detriment of #1. I’d also say almost any investor or fund will have the ambition to achieve capital appreciation as a by-product of its primary goal. These objectives supposedly illustrate that the fund wants to generate yield, but the yield won’t represent the full return throughout a cycle (or at least that’s not the intent).

The fund puts at least 80% of its total assets in equity securities issued by commodity or natural resources companies. The fund can also invest in derivatives associated with natural resources and natural resource companies. Importantly, the trust is actively implementing an options writing (selling) strategy to enhance dividend yield. The fund is about $800 million in size. BlackRock (BLK) charges slightly over 1% in gross management fees. The fund doesn’t use leverage at the moment aside from the option selling. The distribution rate is 6.57%. The fund currently trades at an 11% discount to the net asset value. That’s historically somewhat exceptional. It has traded worse for stretches of time but usually during periods with awful commodity outlooks.

BCX discount or premium to NAV
Data by YCharts

Besides the yield, the historical performance has not been too impressive here. In fairness, the last decade has not exactly been a great period for commodity investors.

BCX price
Data by YCharts

BlackRock is an amazing organization, and it has amazing managers within its ranks. It is also one of the prime examples of a very institutionalized place. It can be harder for managers to achieve good risk-adjusted returns at such a place. There is likely a greater emphasis on liquidity, scalability and consistency of results within the organization.

Personally, I don’t love the idea of generating income and locking yourself into achieving this through option writing. I favor giving skilled managers the freedom to do what makes sense if you pay skilled managers. If it makes sense to sell call options, sell call options. If it makes sense to buy call options, buy them instead. That said, it doesn’t seem the worst time to write call options on underlying commodity stocks.

Speaking more generally, I don’t routinely love writing call options on commodity stocks. Writing call options means you don’t benefit if a stock suddenly surges, while you only receive a little help if there’s a crash. Commodity stocks can surge when favorable events occur, and they’re also prone to crashes if events aren’t favorable. Generally, option premiums are pretty high in the space but deservedly so. This fund’s strategy is likely to lag in commodity bull markets and won’t do much better during bear markets. Over the cycle, it could dampen volatility (the aim here).

When I consider CEFs, I always look at the portfolios that the managers of CEFs put together. Here are the top 10 holdings at the end of May:

Top 10 Holdings BCX

Top 10 Holdings BCX (BlackRock)

It is all relatively big names in the commodities world like Exxon (XOM), Total (TTE), Glencore (OTCPK:GLCNF), Chevron (CVX), Shell (RDS.A) (RDS.B), Nutrien (NTR), Vale (VALE), ConocoPhillips (COP) and Suncor Energy (SU). Bunge (BG) is somewhat of an exception, with a market cap of “only” $14 billion.

It feels a bit arrogant to comment on the portfolio put together by a highly skilled team at one of the premier asset managers of our time. Especially while not even reviewing each and every company in-depth. I’m looking at the portfolio for multiple reasons; it gives me clues whether the management is closet-indexing, whether they could be very skilled (tend to have very creative portfolios) and how they’re thinking about asset management.

Here, the top 10 are all big names, although I wouldn’t say the fund is closet-indexing. It is relatively concentrated, and a lot of other big names would show up in the top 10 instead of some of the smaller issues. There is a need for liquidity as a very large percentage of the portfolio is in names that trade quite easily. I do think they’re trying to manage volatility to an extent through diversification within the commodity sector. There are quite a few names within their portfolio that I really like because of company-specific reasons outside of my general enthusiasm for commodities.

Conclusion

When I buy these CEFs, I tend to hold until the discount decreases to around 5% or goes away, or I find something that I like more. In many cases, there are sizeable distributions (this fund has a distribution rate of 6%+). This fund is trading at quite a steep discount compared to its historical net asset value. Its management fee is quite reasonable. If you like to own a bunch of large liquid commodity companies, this is an opportunity to get them at a discount (although you’ll be paying a management fee). The portfolio looks good but not fantastic. We’re not talking closet-indexing here, but you could find and analyze most of its important holdings yourself.

At the moment, I think this fund is quite attractive, but I’m not buying it. It is attractive because:

  1. The discount is likely to come in a bit over time.
  2. I like the commodity space (given the energy transition backdrop and, IMHO, overplayed recession fears).
  3. It doesn’t seem to be the worst time to sell some calls (as uncertainties are driving option premia).

If I were only buying this to benefit from the large discount to net asset value, I’d offset my exposure through ETFs. For example, combine it with several shorts in ETFs like the SPDR S&P Global Natural Resources ETF (GNR). I’m not buying it because it just doesn’t seem attractive enough compared to other things I could be buying in the commodity space currently. I like several of these fund holdings better, like Vale. But I also like some smaller companies like Antero Midstream (AM), and I’m a big fan of base metal commodity royalty companies. I get that some of these are too small for some investors, but I don’t have those constraints, so I prefer these.

Be the first to comment

Leave a Reply

Your email address will not be published.


*