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Summary BUI is a closed end fund seeking total appreciation through capital gains and income, investing in utility and global infrastructure equities. BUI currently yields over 8% as its discount to NAV is near record highs. BUI is an atypical closed end mutual fund that has been discarded with the rest of the CEFS over the last 12 months. The BlackRock Utility & Infrastructure (NYSE: BUI ) closed end fund is an investment that I could of only wish for… on paper. BUI is an investment in one of my favorite asset classes (utilities and infrastructure), utilizing one of my favorite investment strategies (covered call writing), in one of my favorite investment fund structures (closed end fund). Unfortunately, since inception, it has been at best a mediocre investment, in particular over the last 12 months. Is the fund a bad fund? Or has the baby been thrown out with the bathwater? The Basics The BlackRock Utility & Infrastructure fund is a closed end mutual fund seeking income and capital appreciation by investing in equities of companies engaged in the utilities and infrastructure business. It carries a 1.1% expense ratio and invests in a portfolio of utility stocks that can be found in many other utility ETFs and mutual funds. What separates this fund from the competitors is the portfolio managers’ strategy of using/writing call options on the individual stocks in order to generate current income. In theory, this should reduce the overall volatility of the portfolio while providing current income. Currently it is paying a distribution rate of 8.57%. In rising markets, these types of portfolios tend to underperform the market as the upside is capped with the written call options. Let’s see how the portfolio has done. The Numbers Closed End Funds are a unique type of an investment that require extra care and attention. Unlike a traditional open end mutual fund that trades once a day, a closed end mutual fund trades like a stock and can be bought and sold throughout the day. Unlike traditional mutual funds which are priced once a day at the net asset value, closed end mutual funds trade a market prices, that may or may not be indicative of the true net asset value. For these reasons closed end mutual funds are typically more volatile compared to traditional funds, not because of the underlying performance, but rather on the reactions or over reactions in the market price. To understand this, you must also keep in mind that closed end funds, unlike their open ended siblings raise money once, and then they list on a public exchange and trade like a stock. If you as the investor want to invest money in the mutual fund strategy, you are buying someone else’s shares. The fund managers have that finite portfolio to work with and that is it, no new shares are created when you decide to invest your money. What this ends up translating into is most closed end funds trading at discounts below the actual value of the funds. That is why it is important to note the difference between the Market Price and the underlying Net Asset Value (NAV). In times of trouble, the market price may be significantly below the actual NAV, and may be a good opportunity to invest and buy assets on sale. Over the last 12 months, Closed End Funds have been hit quite hard with investors pulling out money. Typically, a closed end fund investor is looking for current income. The recent concerns about the health of the high yield markets as well as the interest rate hikes has caused fear and money flowing out of such investments. Unfortunately most people look at closed end funds as an asset class rather than as an investment vehicle with underlying investments. Has BUI been lumped in with other closed end funds? Let’s take a look. (click to enlarge) (Source: CEF Connect) As you can see, YTD BUI’s market price is down approximately 11%, however the underlying NAV is down only 6.99%. In essence, the investors were willing to accept less for the fund that what it was actually worth. In 2012 and 2013 you have had the same results. 2012 in particular resulted in a situation where the funds market price was down 3.51% for the year, yet the underlying net asset value was up 8.69%. 2014 showed what happens when people are chasing yield and were willing to pay more for the fund than what it earned where the market up was up 24.95%, yet the underlying NAV was up only 16.05%. An astute closed end fund investor looks for these opportunities to buy or to cash in their gains. On an annualized basis we have the following. (click to enlarge) (Source: CEF Connect) Since the fund launched in 2011, the total return including distributions averaged out to 3.43%. The fund has lost value, however it distributed a significant amount of dividends and income from the options. On a net asset value basis, the fund has performed respectably, earning an annualized 7.69%. Included are the performance numbers for the Closed End Fund Utilities category. What you can see is as expected, the fund has underperformed versus the peers, however during bad times, such as over the last year, BUI which uses no leverage and only generated income by writing call options was able to lower the volatility versus the peers as seen in the net asset value. Furthermore, while investors did notice this, you can still make the argument that this fund was hurt by the overall “dirty water” being thrown out as the market price did not hold up as well as the net asset value. The one place where this is evident is in the visualized chart of historical discounts and premiums to net asset value. (click to enlarge) (Source: CEF Connect) As of the time of writing, the fund is trading a discount of 13.24% to underlying net asset value. This has been historically a bigger discount than average, last seen late 2013 during the Fed’s Taper Tantrum. Conclusions and Final Thoughts Going through this analysis, it becomes more and more clear that unfortunately for this fund, it is lumped in with other closed end funds. Unlike other funds that employ leverage and invest in risky assets, BlackRock’s Utility & Infrastructure fund uses no leverage, buys globally listed equities, generates income with covered call options and has reasonable management fees. Unfortunately even though the underlying portfolio is seemingly performing as intended, the majority of investors are willing to overlook that and treat this as any other closed end fund. For a long term income investor looking for utility and infrastructure exposure, this fund at the current prices may be worthy of a look, at the very least put on your watch list. Scalper1 News
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