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rd80 (99.37)

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December 17, 2011 – Comments (9) | RELATED TICKERS: BDT

A recent scan of the Stocks Needing More Picks list turned up a closed-end fund that looks pretty interesting.  BlackRock's Strategic Equity Dividend Trust (BDT).  I like dividends, so took a little closer look.

For those that may not know, a closed-end fund is similar to a mutual fund except the share count is fixed and it trades on an exchange.  Since the count is fixed, the shares usually trade at a discount or premium to the assets held by the fund and those pricing disconnects can be significant.  On the 15th, BDT closed at $9.63 per share with a net asset value of $11.19 - a 14% discount to NAV (hence the blog title).

BDT holds a portfolio of mostly dividend paying stocks and enhances returns -- or at least trys to -- by writing covered call and put options.  The stocks held are mostly small-to-mid caps and the largest holding is Hormel (HRL).  As of the most recent report, nearly 20% of the portfolio was overwritten by options, at the upper end of the 10-20% option overwrite the fund targets.

Trailing distribution yield is 6.8% based of Friday's close and the last 12 months of distributions.

There's a lot to like here.  The fund is selling at a nice discount to its underlying assets, great dividend yield, professional management from BlackRock.  But... quality dividend paying stocks with the covered option kicker should have done pretty well in this year's nutty market -- BDT's dividend adjusted 5% loss trails SPY's 1.3% loss.  And the 5-year track record is well below the S&P500. 

The underperformance could simply reflect a small cap vs large cap performance gap.  Year to date, the S&P500 has outperformed the Russell2000, but the small caps didn't get beaten as badly over the five-year gauntlet.

Here's the fund profile.

I'm torn here.  The big discount and big yield are crying for a green thumb and maybe some real cash.  But consistent underperformance combined with many, many red CAPS points the last time I tried calling a closed-end fund pick are saying stay away.

How about it fellow Fools.  Anyone familiar with this fund?

Fool on!  Russ

9 Comments – Post Your Own

#1) On December 17, 2011 at 9:07 PM, portefeuille (99.73) wrote:

a biopharma fund "trading at a discount" of around 18%.

 

http://www.bbbiotech.ch/en/bb-biotech/investor-relations/share-price/

http://www.bloomberg.com/apps/quote?ticker=BION:SW

http://www.bloomberg.com/apps/quote?ticker=BBZA:GY

BB Biotech shareholders agree to the motions put forward by the Board of Directors

 

There are currently 1600 BION:SW shares in the fund with break-even of around 51.41 CHF.

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#2) On December 17, 2011 at 9:13 PM, portefeuille (99.73) wrote:

the fund.

my "fund" (see here).

 



enlarge

from here.

Monthly News November 2011 (pdf)

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#3) On December 17, 2011 at 11:00 PM, HarryCarysGhost (99.71) wrote:

Hey Russ,

Took a cusary glance at this fund and my first reaction was-

RUN AWAY!!!RUN AWAY!!!

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#4) On December 18, 2011 at 10:47 AM, devoish (98.97) wrote:

Russ,

from the annual shareholder report, book of 10 that you linked to

from pg.64

Blackrock charges 1.4% of the funds net asset value in fees which was $2,656,461. They delivered $10,506,350 in dividends. Ultimately they 'managed' to take 25% of the dividends you risked your money to get, leaving you with 6.3% minus their 1.57% = a 4.7% dividend. The USA then takes 15% of that, or .7% (notably less than half what Blackrock takes) leaving you with a 4% dividend unless you drip it back in.

Because they take their fee based on NAV you will see the full 14 cents on the dollar, except, if folks were smart investors they would realise that the fund is only worth 98.5 cents on the dollar after fees.

That brings your upside down to 12.5cents.

pg 72.

In the history of the fund, every year since 2006, there has always been a 10-15% (.86-.90 cents on the dollar) difference between share price and NAV. A consistency which suggests to me it may be a function of how NAV is calculated vs total returns, and less a function of investor sentiment or opportunity.

Why am I suspicious? Ignorance. I do not know how they calculate either figure, or how restrictive any legal definition of either term is. So I bet they get some fudging, possibly a wholesale redefinition of NAV that would make your head spin.

And also because of the consistency of the difference between NAV and investor sentiment.

Because they calculate their fee based upon NAV, if you buy 100 shares at the market value of 9.63, you send 963 dollars. Because they calculate the fee based upon NAV of 11.19*.0097% = .108543 fee which they take from your $963. effectively charging you 1.127%, or a very significant incentive to calculate NAV as high as they can.

Also from page 72 they manage to show net investment income of 2.76% of average net assets left over from than 6.3% dividend. I don't think average net assets is the same as Net Asset Value. Sadly I don't know what average net assets means, but I am pretty sure that 2.76% of whatever it is, is significantly less than the nice 6.3% dividend they are getting. But if I am getting 2.76% of a 6.3% dividend, Blackrock is getting 3.54%, and using my money to do it.

SSI would get me a better return, plus disability insurance unless I die young. Federal taxes would at least get me a road we could all use, or solyndra technology for tomorrow.

The value of the trust might increase. The individual companys could double sales and their dividends and make folks who buy this trust very happy a year from now. But i do not think there is opportunity between share price and NAV.

plus, I don't like scum who publish a 6.3% dividend, that is effectively only 2.75% to me. And I would prefer a strong, oppressive Gov't that makes them put this actual return number on the front page, so I don't have to spend 1 hour looking for it when my car needs to be cleaned. That way I could be more productive, and reduce my risk of losses to these thieves putting one over on me.

Best wishes,

Steven 

PS. on page 64, right next to this fund, is BQR. In BQR, Blackrocks fees took 75% of the dividends from investors. Leaving a net investment income of .47% while losing investors 21million dollars. The current yield is posted as 12%.

PPS. Hope that helps.

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#5) On December 18, 2011 at 3:01 PM, rd80 (99.37) wrote:

Hi Steven,

Thanks for filling in many of the missing puzzle pieces, especially fees being responsible for much of the underperformance.  According to the table on pg 72, fees were 0.93% of net assets - that fits the numbers from pg. 64 -- $2.66 million fees / ~$300 million of net assets.  That's in line or less than a typical actively managed mutual fund.

The dividend yield - currently 6.8% -  is ttm distributions -- $0.65/share -- over current share price --$9.50, so no fudging there; that's current yield to the shareholder assuming the dividend rate holds.

NAV is fairly straight forward for a fund like BDT since the holdings are nearly all equities or options with regular market prices.  Pp 23-26 of the annual report list the fund's holdings.  Nearly everything is Level 1 - meaning it's valued based on a market quote.  There's a little bit of Level 2, which means it's valued based on market prices for similar securities.  No Level 3, which would be mark-to-model (or make-believe). 

Thanks again for the detailed response.

 

 

 

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#6) On December 19, 2011 at 8:38 AM, devoish (98.97) wrote:

Rd,

What is "net investment income" of "average net assets"?

Best wishes,

Steven

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#7) On December 19, 2011 at 9:56 AM, devoish (98.97) wrote:

Russ,

I think there is a difference between the dividends paid by the companys the trust owns into the trust (gross income?) - 6.3% - and the dividends distributed to the trusts investors, the "net investment income" - 2.75%.

Best wishes,

Steven

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#8) On December 19, 2011 at 8:19 PM, rd80 (99.37) wrote:

Hi Steven,

The trust has distributed 16.25 cents/share quarterly for the past three years.  That works out to 65 cents per year per share.  Today's closing share price is $9.36 so the distribution yield to the fund's investors is just under 7% provided the payout continues at the same rate. 

The net investment income is dividends and 'income-affiliated' (not sure what that is) minus operating fees and expenses.  In addition to the investment income, the fund also has realized capital gains and gains on option trades; those totaled over $17 million in 2010.

Best wishes back to you,

Russ

 

  

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#9) On December 19, 2011 at 10:16 PM, devoish (98.97) wrote:

So how does that work?

You get a dividend of 7% (hurray!) Then they take out fees and send you 2.75%?

Or do they send you the whole 7% and then they cash out shares to pay the fees and the value of your holdings drops 4% but you still see a 7% dividend?

I would expect net income to be what the fund makes investors after expenses and if that is 2.75% that is a pretty hard hit to that dividend.

But who knows anything anymore? I would never have guessed that a brokerage would be allowed to put my money up as collateral against their investing loss either.

Best wishes,

Steven

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