BCAT: BlackRock’s Multi Asset CEF finds its footing, 8% yield (NYSE: BCAT)

gorodenkoff

Thesis

BlackRock Capital Allocation Trust (NYSE: BCAT) is a new multi-asset closed-end fund in the BlackRock suite of products and was launched in September 2020. The primary objectives of the vehicle are total return and income. According to fund documentation:

The Trust invests in a portfolio of equity and debt securities. Generally, the Trust’s portfolio will include both equity securities and debt securities. However, at any time, the Trust may emphasize either debt or equity securities. The Trust employs an option writing (selling) strategy with the objective of generating current gains from option premiums and enhancing the Trust’s risk-adjusted returns.

The fund is currently overweight in fixed income securities (around 54% allocation) with a 40% allocation in equities and a cash allocation of around 6%. The bond portion is mainly composed of bad debts with an equal split between corporate credit and securitized products. The fund has a high fixed income allocation of 17% to unrated fixed income debt. As a reminder, unrated fixed income securities are not necessarily “B” or “CCC” debt (i.e. not the riskiest) but for size or cost reasons, they are not covered by a public rating agency. Unrated debt, however, is generally more volatile and illiquid.

BCAT can change its fixed income/equity/cash allocation as it sees fit over time and does not have to remain overweight fixed income. An investor should think of BCAT as a leveraged one-stop-shop portfolio. Rather than asking individual investors to split between stocks, bonds and cash, BlackRock does it for you with added leverage. The fund is down -17% in 2022 and down almost -27% last year. Year-to-date performance mimics the S&P 500, but over a one-year period, BCAT is significantly underperforming the index. The reasons for this are twofold: on the one hand, you have the leverage of the fund which is currently at 20%, and on the other hand, you have the “new drawdown of the CEF”.

If an investor looks at the historical performance of CEF, they will notice a funny commonality – they all tend to lose money in the first 1-2 years. A CEF usually costs $20/share, but usually ends up going down. Not all CEFs are created equal, of course, but since inception the management team has had some pressure to allocate capital regardless of timing, which might not be optimal for the end investor. Examining very well-established managers such as PIMCO or BlackRock (BLK), particularly on the fixed income side, provides good insight into this nascent vehicle behavior. Again, our view here is that the manager is under significant pressure to make their cash work to justify the fees charged and in doing so they are investing at sub-optimal times.

The fund is currently trading at a -12% discount to net asset value due to its poor performance since inception, but we expect this discount to reduce as the market recovers and the fund delivers its products. We see BCAT as a “one stop shop” for leveraged portfolio management. An investor who does not want to do a significant amount of research on fixed income or equity CEFs can simply trust the BlackRock platform and its ability to provide long-term alpha. Due to its recent inception, the fund has underperformed, but its future is bright. We believe that 2023 will be an exceptional year for BCAT with both an increase in the prices of the underlying assets and a reduction in the net asset value. BCAT is most suitable for retail investors who don’t want to do a lot of research in the CEF space and want a large management platform to allocate assets to them.

Assets

BCAT is a multi-asset CEF, so it holds a mix of fixed income and equity securities:

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Allocation (Fund website)

We can see that the fund is now overweight in fixed income with a slice of 53.81%, while the share of equities sits at 40.34%. On the equity side, the fund is overweight in information technology and consumer discretionary:

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Sectors (Fund website)

This breakdown of equity allocation explains some of the underperformance in 2022, with the Nasdaq significantly underperforming the S&P 500.

On both the equity and fixed income side, the fund is focused on North America:

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Geography (Fund website)

On the fixed income side, the fund has an even split between corporate credit and securitized products:

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Fixed income splitting (fund website)

For both corporates and securitized products, credit quality is overweight in high yield:

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Ratings (fund website)

We can see from the table above that the majority of the portfolio is concentrated in the “BB”, “B” and “NR” names. NR stands for unrated, and it means that major rating agencies such as Moody’s and S&P do not have an ongoing public rating for the respective credits. This does not mean that the credit does not have a private rating. A private rating is a rating that costs less and is only available to a requesting party who must pay a fee for it.

Performance

The fund is down -17% since the start of the year:

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Cumulative performance since the beginning of the year (in search of alpha)

The 2022 performance of the BCAT is in line with the S&P 500 index. However, over a retrospective period of one year, the CEF strongly underperforms:

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1 year performance (In search of Alpha)

We can see that over 1 year, the BCAT is down more than -26% against only -7% for the index.

Premium/Rebate to NAV

The fund is currently trading at a -12% discount to net asset value due to its poor performance since inception:

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Bonus/Rebate to NAV (BlackRock)

We can see from the chart above, courtesy of BlackRock, that the fund dipped into a negative discount to NAV territory as its performance deteriorated. Because it is a new fund, BCAT now benefits from a “historical” discount to the net asset value. We expect this discount to reduce in 2023.

Conclusion

BCAT is a multi-asset CEF offering from BlackRock. The vehicle was launched in 2020 and experienced poor performance in its first year. In 2022, the fund posted a total return in line with the market and is forecast for a robust 2023 with signs of fund bottoming both on the underlying asset side and historically high discount by relative to the net asset value. We view BCAT as a “one stop shop” for CEF investors looking to use BlackRock as an asset allocator with added leverage.

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