BMEZ: Higher Risk Healthcare Exposure With Potential For Higher Reward

seekingalpha03-20

BlackRock Health Sciences Term Trust has seen its discount narrow somewhat since our last update, but it remains attractive still.BMEZ utilizes a covered call writing strategy and also provides some ...

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Reward\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-03-20 23:40 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4679382-bmez-higher-risk-healthcare-exposure-with-potential-for-higher-reward><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>BlackRock Health Sciences Term Trust has seen its discount narrow somewhat since our last update, but it remains attractive still.BMEZ utilizes a covered call writing strategy and also provides some ...</p>\n\n<a href=\"https://seekingalpha.com/article/4679382-bmez-higher-risk-healthcare-exposure-with-potential-for-higher-reward\">Source 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SGD-H"},"translate_title":"BMEZ：高风险医疗保健暴露，有可能获得更高回报","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"XLV":1,"LLY":1,"IOVA":1,"HCSG":1,"BSTZ":1,"BMEZ":1,"VKTX":1,"XBI":1,"BLK":0.9},"content_text":"BlackRock Health Sciences Term Trust has seen its discount narrow somewhat since our last update, but it remains attractive still.BMEZ utilizes a covered call writing strategy and also provides some private investments to help deliver performance.The biotech space has performed rather poorly in the last several years but 2024 seems to be a bit more promising.   mohd izzuanWritten by Nick Ackerman, co-produced by Stanford Chemist. BlackRock Health Sciences Term Trust (NYSE:BMEZ) has seen its discount to net asset value narrow some from our last update, though the discount still looks appealing today. The biotech space, which comprises a significant portion of BMEZ's portfolio, has been performing better so far to start 2024. However, that was after significant losses in most of the last three years, where the biotech space saw significant declines overall. Besides the healthcare portfolio that BMEZ invests in, they also utilize a covered call writing strategy and invest in private investments to help differentiate the fund. We last covered the fund several months ago, and since then, the performance has been strong. We also have the latest annual report that can give us a look at how the numbers played out through 2023.   BMEZ Performance Since Last Update (Seeking Alpha)Since our last update, Saba Capital has continued building up their position in this fund. They now own just over 19% of the outstanding shares. Further, they've ratcheted up the pressure by looking to get representation on the BMEZ Board. This wasn't just for BMEZ, but they are launching efforts on a number of the BlackRock funds as well as other fund sponsors such as Nuveen. BMEZ Basics  1-Year Z-score: 1.27 Discount: -12.69% Distribution Yield: 6.65% Expense Ratio: 1.32% Leverage: N/A Managed Assets: $1.98 billion Structure: Term (anticipated liquidation January 29, 2032)  BMEZ has an investment objective to \"provide total return and income through a combination of current income, current gains, and long-term capital appreciation. It intends to do this through \"at least 80% of its total assets in equity securities of companies principally engaged in the health sciences group of industries and equity derivatives with exposure to the health sciences group of industries.\" Performance - Discount Remains Appealing The fund doesn't use leverage in the form of borrowings. Instead, the fund utilizes a covered call writing strategy on a portion of its underlying portfolio. In a strong bull market, that could limit some upside potential, but it also can generate options premiums to help support the regular monthly distribution. It can also provide some gains if the market moves sideways. In the volatile space of biotech, there generally isn't a lack of volatility. On the other hand, the other sleeve of the portfolio is more traditional healthcare names, which are often less volatile. Further, the fund limits its overwrite portion, and the last reported overwrite percentage of the portfolio was around 24%. On a YTD basis, BMEZ has performed rather well. The SPDR S&P Biotech ETF (XBI) itself had performed even better. This was largely thanks to a sizeable bump in February 2024 that saw the performance really diverge on a total NAV return basis.   YChartsOne of the main factors for this was Viking Therapeutics (VKTX) surged after announcing strong phase 2 results for its obesity drug. BMEZ held a position in VKTX at the end of December 2023, but it was a rather small position for the fund that didn't have a huge positive impact on the fund in terms of performance. Another biotech name that similarly saw a sharp rally was Iovance Biotherapeutics (IOVA). This was after an \"accelerated FDA approval for its melanoma drug Amtagvi...\" Once again, the fund held a position in this name, but it had an even smaller weight. At the end of December 2023, it was a $1.368 million position, but spread across a ~$2 billion fund meant the position was worth less than 0.07% of the portfolio. So again, the strong results meant very little for BMEZ, but for XBI, it was a more meaningful contribution as a pure-play biotech fund. Despite the stronger performance of biotech more recently, this has been a rather disappointing area to invest in over the last three years. In this case, BMEZ has outperformed XBI, but both of these funds massively underperformed the Healthcare Select Sector SPDR (XLV). XLV is a representation of the more broad-based healthcare space, which invests more heavily in larger, more established healthcare companies.   YChartsOne area that could also help BMEZ in the future is if the IPO market returns more meaningfully. This is because the fund invests in private companies, with the latest commentary noting 21 private investments, which comes out to 7.8% of the fund's portfolio. In total, they are targeting a private allocation closer to 25% for the fund, but they are taking their time to get there. Distribution - Managed Policy In our prior update, we discussed the new distribution policy for BMEZ and a couple of its other private-focused sister funds. This is a policy that looks to take the average NAV over the prior 12-month period and pay out a distribution based on 6% annualized of that. Thanks to the fund's sizeable discount, the distribution rate for investors is actually a bit better at 6.65% currently. That said, when his policy was first put into place, it meant a huge distribution cut at first. It also means a changing distribution payout every month. However, the changes in the average NAV month-over-month should mean that the payout shouldn't change too dramatically. Of course, over longer and longer periods of time, we would expect it to change more meaningfully.   BMEZ Distribution History (CEFConnect)To cover the fund's distribution, it will require all capital gains. It isn't unusual for equity funds to rely significantly on capital gains to fund their payouts to investors. Still, with the focus on more growth investments with a large biotech sleeve, it means very little coming in from dividends. In fact, the fund doesn't have positive net investment income at all, which is something we see in most heavy growth-focused CEFs. Most notably, in nearly all of the tech-related funds, this is often the case.   BMEZ Annual Report (BlackRock)To help fund the capital gains bucket to cover the distribution, the fund has benefited from writing covered calls. In 2023, this resulted in the fund's realized gains from options writing to offset the losses realized in its underlying portfolio. Though the fund also saw significant unrealized appreciation in the portfolio too, during this period.   BMEZ Unrealized/Realized Gains/Losses (BlackRock)For tax purposes, the fund's entire distribution was classified as return of capital in 2023.   BMEZ Distribution Tax Classification (BlackRock (highlight from author))This is a good example of how return of capital isn't always necessarily destructive, at least not in the year that it is characterized. The fund realized sizeable losses in 2023, but they left their gains unrealized. Those sizeable losses due to weak performance from the fund in the prior couple of years, with some carryforward losses, will likely mean more ROC distributions in the future. Another way to gauge it simply is by looking at the returns of the fund. The fund didn't have a blowout in 2023 or anything, but noting a 5.6% total return suggests that, no, not all of the entire distribution would be destructive. ROC distributions could even be the case if the fund starts performing better, and we see 2024 as a strong recovery year. As of its last annual report, the fund had $43.69 million in carryforward losses. With a now lower distribution rate, the fund will also pay out less this year relative to 2023. BMEZ's Portfolio With a closed-end fund that also has a meaningful allocation to private investments, the value of the NAV is always something worth noting. We discuss this in every update. The reason is that private investments and level 3 securities can be valued with estimates only, as there isn't a market where these securities can trade. That makes them illiquid, and sometimes, the value isn't really the value when it comes to selling a position. After all, something is only worth what one is willing to buy it for. That can play a role in the fund's discount/premium as well, as that adds an additional layer of doubt in terms of the NAV for BMEZ. In the case of BMEZ, it really isn't that much at this time, with it only being around 7.8% of the fund's assets. If the values were off by even half, which is highly unlikely, the discount for BMEZ would still be attractive.   YChartsHowever, it can become more of a factor if it gets to its 25% target allocation of private investments. BMEZ's sister fund, the BlackRock Science and Technology Term Trust (BSTZ), had nearly 34% of its portfolio as private investments at the end of December 2023. So, that becomes more of a factor worth considering in terms of the discount/premium that a fund could be trading at. That said, all of BlackRock's level 3 investments, including its private investments, are valued by a third party based on clearly defined, unobservable inputs. I've also observed that they are better at updating valuations for their closed-end funds than some other fund sponsors. Just as a quick example, one of the latest private investments was in the Kartos Therapeutics Series C, a position acquired on 8/22/2023 with a cost of $7,539,875 and that value has changed to $7,562,550 by the end of December 2023. The valuation change wasn't drastic, but the fact that the value has reflected a change is the main point here. This is because there is another tech-related fund I noticed that had gone some years without seeing the valuation change at all. Of course, the benefit of not changing the value is that the management team can continue to earn a higher fee, in particular, if those valuations have gone down. Anyway, the point is that it seems BlackRock is much more on top of valuing its private investments. Being the largest asset manager in the world, I suspect they have more to lose rather than gain by not staying up-to-date with their private investment valuations. When looking at BMEZ's portfolio in terms of industry allocation, that's where we can see the fund's significant exposure to the biotechnology space. It's what can make the fund more volatile, but it's also what can make the fund the most rewarding - when that space is performing well, that is. The allocation to biotech was down slightly from the 45% allocation listed when we last looked at the fund.   BMEZ Industry Allocation (BlackRock)BMEZ has not added any private investments since our last update, but we can see the names of their Q3 2023 investments listed now. In our prior update, they were simply labeled as Company A-D due to having a policy of not disclosing the names of the private investments for a quarter.   BMEZ Latest Private Investments (BlackRock)The fund listed a total of 173 positions, so it is quite diversified. This is also reflected in the fund's top ten, where no single position really has an overly large overweight allocation within the fund.   BMEZ Top Ten Holdings (BlackRock)We have several names that were among the top holdings in the fund last time listed once again. That said, one notable exception is probably Eli Lilly and Company (LLY). LLY had been surging thanks to the weight loss drug that's expected to generate massive growth in earnings for the company. However, while LLY isn't in BMEZ's top holdings, it is likely still a position in the fund. According to their last annual report, it was still a position, but they've been trimming it over the last quarter as the share price has taken off. Conclusion  BMEZ invests a significant portion of its portfolio in the biotechnology sub-sector of healthcare. This has led to some poor results over the last few years, but there are some glimmers of hope as we enter into 2024. The fund also invests in some private investments, which could benefit from a stronger IPO market returning. The fund's discount has narrowed some since our last update, but it still remains attractive, in my opinion. This is a higher-risk fund, but with that comes a potential for higher reward.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2420722418"}