Blackrock, the world’s largest investment firm, recently made a move that will impact the world of closed-end funds (CEFs). This shift is expected to lead to higher prices for CEF investors in the future, as well as more steady dividends. The $400 billion CEF universe currently yields an average of 8.2%, making it an attractive option for income investors.
One of the reasons CEFs are able to offer such high yields is due to their discounts to net asset value (NAV). For example, the Highland Opportunities and Income Fund (HFRO) has a 7.2% yield, but trades at a 49.9% discount to NAV. This means the fund’s managers only need to earn 3.6% on assets to cover the payout, despite the high yield on the market price.
BlackRock’s recent announcement regarding buybacks of shares for some of its CEFs is expected to have a positive impact on the funds. The firm will repurchase shares of 14 of its 50 CEFs if their discount to NAV is above 7.5% on average during a three-month measurement period. This move is likely to limit how low these funds’ discounts will go, providing a potential opportunity for investors to earn instant gains.
While some BlackRock CEFs, such as the BlackRock Science and Technology Term Trust (BSTZ) and the BlackRock Enhanced International Dividend Trust (BGY), are already benefiting from the share buyback program, others like the BlackRock Innovation and Growth Trust (BIGZ) are still trading at a discount. However, investors holding BIGZ may see higher odds of capital gains in the future, along with the fund’s 8.1% dividend yield.
BlackRock’s size and influence in the market mean that its actions are likely to prompt other CEF managers to follow suit. This shift towards limiting discounts on CEFs could have a ripple effect throughout the investment landscape. Investors can expect to see more stability and potentially higher returns in the CEF market as a result of BlackRock’s new approach.
In conclusion, BlackRock’s move to implement a “discount leash” on its CEFs is expected to have a significant impact on the market. Investors who take advantage of this new strategy may see improved returns and stability in their CEF investments. While there may be some initial challenges in implementing these changes, the long-term benefits for income investors are likely to outweigh any obstacles.
