2023-12-06 17:14:11 ET
Summary
- BlackRock Resources & Commodities Strategy Trust is a closed-end fund focused on non-real estate hard assets such as energy, mining, and agriculture sectors.
- The fund has underperformed in terms of total returns over the last decade.
- BCX currently trades at a solid discount to NAV and offers a big yield.
- We look at whether we can make a buy case here.
Everyone loves a bargain. Of course, the key is to distinguish between a bargain and a value trap. Let us look at one closed-end fund today and tell you why we think this is getting to the right spot for value territory. BlackRock Resources & Commodities Strategy Trust ( BCX ) is our protagonist for today, and we give you some hard facts about why this may deserve a second look.
The Fund
BlackRock, Inc. ( BLK ) only needs an introduction if you have been figuratively living under a rock. The line-up of closed-end funds they have is quite wide, and this one has been around since 2011.
The fund focuses on hard assets but the non-real estate kind. So in a sense, it makes a nice complementary fund to ETFs like Vanguard Real Estate Index Fund ETF Shares ( VNQ ). The non-real estate hard assets we are talking about here are the energy, mining, and agricultural sectors. BCX maintains a large exposure to the first two with farming making up around a fifth of the total.
Individual holdings are concentrated in the large cap arena with Shell plc ( SHEL ), Exxon Mobil Corporation ( XOM ) and TotalEnergies SE ( TTE ) taking the lead. Mining exposure mavens include BHP Group Limited ( BHP ) and Vale S.A. ( VALE ).
The average holding is pretty large here and there is hardly anything that could be even remotely described as speculative investments. BCX takes this safety approach and adds another layer on to it by using covered calls. At last check, about 30% of the portfolio had some sort of options sold on it.
Fees & Performance
The fund has a management fee of 1% and the other expenses add up to 5 basis points giving you 1.05% in total. There is no leverage to speak of, so the fund is not going to be running a high bill. The performance has been so-so. Total returns have been poor over the last decade. This is true whether you look at NAV or price.
CEF Connect throws this into sector equity funds, which this is. But of course, this comparison is weird as you have every kind of sector equity being benchmarked against the average of that group. It would make little sense for BCX to be compared against John Hancock Financial Opportunities Fund ( BTO ) for example. But that is how CEF Connect runs the numbers, possibly because there are not enough funds in each sector to create different groupings. A better comparison would be the materials or energy sector ETFs. That said, the results actually get a lot worse when we compare it with the Materials Select Sector SPDR Fund ETF ( XLB ) or Energy Select Sector SPDR Fund ETF ( XLE ).
What has caused this? It is hard to know exactly what BCX owned over the years and what prices those shares were bought or sold. But one area we have noticed low exposure to was the steel and chemical sectors. XLB has a huge exposure to steel and chemical sector stocks. These have really done well over the last five years. In fact, Linde plc ( LIN ) makes up 21% of XLB.
Of course, that is not an excuse for a fund that could include anything from anywhere. Covered calls might have been another negative contributor as the fund could be called away on rapidly appreciating stocks after the COVID-19 lows.
Pricing
While there are negatives here, one has to take that in the context of the pricing. The fund currently trades at a modestly wide discount to NAV. This exceeds the average over every timeframe and results in a solid negative (negative is good here) Z-score.
Looking out longer term, we see that the 14.78% discount is near the bottom of its range. We saw worse during late 2015, early 2016, and during the COVID-19 bottom in 2020.
So at least the pricing level is not a headwind.
Outlook & Verdict
We are bullish on the energy sector. On the energy front, natural gas is looking extraordinarily cheap, especially when you look out beyond the next 12 months. So buying BCX is like buying a cheap asset at a double discount. We recently started layering in some covered calls in this sector.
On the mining front, we have a mixed view. We think some copper mining plays are cheap. We also like the precious metals sector royalty plays like Wheaton Precious Metals Corp. ( WPM ). But we remain hesitant on the iron-ore behemoths like BHP. We see China's real estate bubble unwind as an extraordinary headwind. After all, that sector consumed 60% of the total global iron ore over the past decade. We have actually had some success on the short side in the past on BHP, though we currently don't have a position. Overall, this gets us to a neutral position on BCX. Investors looking to align with our views can keep an eye on BlackRock Energy & Resources Trust ( BGR ).
The fund often trades at a wider discount to BCX and if we get such an opportunity here, you should consider grabbing it.
Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints.
For further details see:
BCX: Beaten Down Sector Exposure With Wide Discount And 7.2% Yield