BCX - BCX: Well-Run Fund Continuing To Be Supported By Share Repurchases

2023-05-17 03:29:49 ET

Summary

• BlackRock Resources & Commodities Strategy Trust is an equity closed end fund.
• In today's environment where a high amount of assets are underperforming, CEF structures exhibit significant discounts to NAV, especially equity CEFs.
• BCX is down modestly in the past year, yet its discount to net asset value has widened to historic levels, now clocking in at -14.8%.
• BlackRock just announced its latest share repurchase figures for its suite of CEFs, with BCX seeing almost 1% of its outstanding notional being repurchased in the past quarter.
• The SEC has adopted new legislation regarding enhanced reporting requirements for CEF share repurchases.

Thesis

BlackRock Resources & Commodities Strategy Trust ( BCX ) is an equity closed end fund. The fund invests in equity securities issued by commodity or natural resources companies, and has been covered by us previously here . In today's environment where a high amount of assets are underperforming, CEF structures exhibit significant discounts to NAV, especially equity CEFs (because there are no cash-flows to be had outside capital gains in most instances). The hallmark of good managers in these situations is the successful implementation of share repurchases, which serve to provide a bottom for the discounts and are a market based instrument to close the respective arbitrage.

BlackRock just announced its latest figures for its suite of CEFs, with BCX seeing almost 1% of its outstanding notional being repurchased in the past quarter:

BlackRock usually engages in these purchases when the discount widens above -10%, and for BCX the discount has continued to widen despite the fund's benign total return in the past year. We view the current client flows as a direct result of recessionary positioning, where institutions do not want to be long this cyclical asset class going into a weak economic environment.

BlackRock is doing the right thing here by supporting its CEF structure via repurchases, because we have seen in the case of MLP funds how very wide discounts attract an activist investor base such as Saba Capital, which ultimately push for very similar actions to be undertaken in order to narrow the discount.

Ultimately very wide discounts to NAV negate the very existence of the CEF structure. Why would you buy BCX when you can just purchase the underlying equities outright and not be subject to a potential further widening of the discount to asset values? Very large discounts are ultimately toxic for a fund; therefore we are of the opinion that BCX is a well-run fund via the corporate actions taken by its manager.

To note that CEF share repurchases have not gone unnoticed by the SEC, which has beefed up its reporting requirements, as we discuss in the below section.

Discount to NAV Performance

The fund is now approaching its all-time wide in terms of its discount to NAV:

We can see the CEF having a high beta to overall market risk-on moves, rather than the underlying commodity asset class. The fund experienced its widest discount to NAV ever during the Covid crisis, and managed to pull to flat to NAV in 2021.

Despite its fairly benign total return in the past year, the CEF has continued to see its discount widen:

We can see the CEF having only a -6.8% total return in the past year, yet its discount has widened by almost 7%. We feel there is a flight of capital from commodities at the moment, as market participants price in a recession.

New Reporting Requirements

Also to note that this area of the CEF world has been in focus as of late, with the SEC recently adopting new reporting requirements:

On May 3, 2023, the U.S. Securities and Exchange Commission (the “SEC”) adopted amendments to modernize the disclosure requirements for repurchases by issuers ¹ of their equity securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

• Issuers must disclose daily quantitative share repurchase information on a quarterly or semi-annual basis depending on the type of issuer, but not after every repurchase as had been initially proposed
• Issuers must disclose the required quantitative data on an exhibit filed with Form 10-Q or 10-K (for domestic corporate issuers and business development companies) or on Form N-CSR (for registered closed-end management investment companies that are exchange traded) or new Form F-SR (for foreign private issuers)
• Issuers must check a box in their applicable reporting document indicating if certain officers or directors purchased or sold shares of the issuer’s securities within four business days of the public announcement of the issuer’s repurchase plan or program

As managers increasingly use this form of a corporate action to sustain share prices and discounts to NAV in stressed markets, the regulators are optimizing the disclosure rules around share repurchases. We view this as a positive, since transparency and increased reporting requirements for each entity can only benefit retail investors.

Conclusion

BCX is a closed end fund that focuses on commodities companies equities. The vehicle is down modestly in the past year, yet its discount to net asset value has widened to historic levels, now clocking in at -14.8%. BlackRock has engaged in share repurchases to narrow this down, buying almost 1% of the outstanding shares in the past quarter. We view this action as a hallmark of a well-run fund, since very wide discounts to NAV are toxic for a CEF. The increased share repurchases in the market has not gone unnoticed, with the SEC now adopting new reporting requirements for managers. We also view this as a positive, since more transparency for the CEF asset class is always a positive for retail investors.

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