BlackRock, the world’s largest investment firm, made a significant change on May 3rd that is expected to impact closed-end funds (CEFs). CEFs currently yield an average of 8.2%, making them a popular choice for income investors, especially the wealthy. These funds offer higher yields than stocks, municipal bonds, Treasuries, and real estate investment trusts due to their discount to net asset value (NAV).
One example is the Highland Opportunities and Income Fund (HFRO), which has a 49.9% discount to NAV. This means that while the fund offers a 7.2% yield based on market price, it only needs to earn a 3.6% yield on NAV to cover payouts to investors. This makes it easier for CEF managers to maintain high dividends even in a lower yielding environment.
BlackRock announced a new “discount leash” policy on May 3rd for 14 out of its 50 CEFs. The firm will repurchase shares of these funds if their discount to NAV exceeds 7.5% on average during a three-month period. This move is expected to limit how low these funds’ discounts will go, providing potential instant gains for investors who participate in the share buyback.
While BlackRock’s buyback plan is meant to reduce discounts, some funds like the BlackRock Innovation and Growth Trust (BIGZ) are still trading at significant discounts despite the announcement. However, investors who buy these funds now may see higher chances of capital gains in addition to the funds’ already attractive dividend yields.
Overall, BlackRock’s decision to repurchase shares of its CEFs is likely to have a positive impact on these funds and may encourage other CEF managers to follow suit. This shift is expected to lead to higher prices and even steadier dividends for CEF investors in the future. While not all funds may see immediate changes, the long-term effect of BlackRock’s move on the CEF market is something to keep an eye on for income investors.
