BlackRock, a prominent asset management firm, is implementing significant changes to several of its high-yielding closed-end funds (CEFs), most notably the BlackRock Innovation and Growth Term Trust (BIGZ). This tech-focused CEF, boasting nearly $2 billion in assets under management and a substantial 13% yield, has become the focal point of investor attention due to its recent underperformance and subsequent restructuring efforts. These changes are, in part, a response to activist pressure on both BlackRock and the CEF industry as a whole, demanding improved performance and shareholder value.
While BIGZ undergoes these transformative changes, two other BlackRock tech-focused CEFs, the BlackRock Science and Technology Trust (BST) and the BlackRock Science and Technology Term Trust (BSTZ), offer valuable insights into the dynamics of the tech sector and the diverse strategies employed by BlackRock. BSTZ, also yielding 13%, focuses on private tech firms and rapidly growing public companies like NVIDIA and Astera Labs, key players in the artificial intelligence (AI) landscape. Despite the recent market volatility triggered by the emergence of a competitive Chinese AI chatbot, DeepSeek, both companies have delivered impressive returns since Astera’s IPO in March 2024. However, the persistent uncertainty surrounding the AI sector underscores the importance of diversification.
BST, in contrast, mitigates risk by balancing its NVIDIA position with holdings in established tech giants like Microsoft, Apple, Meta Platforms, and Amazon. This strategic allocation has resulted in lower volatility for BST over the past year, both in terms of its net asset value (NAV) and market price, compared to BSTZ. While BSTZ benefited from the renewed investor enthusiasm for tech following the 2022 downturn, BST’s stability provides a crucial counterbalance. The combined performance of BST and BSTZ exemplifies a successful strategy of blending high-growth potential with reduced volatility, generating a 24% average return over the past year, significantly outperforming the S&P 500.
BIGZ, unlike its counterparts, has diversified beyond the tech sector, holding significant positions in companies like Axon Enterprise, Vertiv Holdings, and Comfort Systems USA. This focus on smaller, rapidly growing firms, while theoretically promising high returns, has not translated into comparable performance. BIGZ’s total NAV return, including dividends, has lagged significantly behind BST and BSTZ, prompting activist investors to demand action. BlackRock has responded by implementing a series of changes, including a new management team, a refined mandate with a tighter focus on technology, and a substantial share buyback program.
The share buyback program is a particularly noteworthy development, offering shareholders the opportunity to tender their shares for 99.5% of the fund’s NAV per share. This initiative aims to support BIGZ’s market price and provide an attractive exit strategy for investors. With BIGZ currently trading at a 9.1% discount to NAV, investors can potentially capitalize on this discrepancy by purchasing shares at a discounted price and tendering them at a higher value, representing a 9.5% potential gain independent of the fund’s market performance. This arbitrage opportunity, however, carries the risk of a potential decline in BIGZ’s NAV before the redemption date, which could result in a lower redemption value. Nevertheless, investors who choose to retain their shares can continue to benefit from the fund’s 13% dividend yield, contingent on the new management’s ability to maintain sufficient profitability.
The evolving landscape of BlackRock’s tech-focused CEFs highlights the complexities and opportunities within the sector. While BST and BSTZ demonstrate the benefits of a balanced approach to tech investing, BIGZ’s transformation underscores the importance of adaptability and responsiveness to market dynamics and investor demands. The share buyback program presents a unique opportunity for investors, albeit with inherent risks. Ultimately, the success of BIGZ’s restructuring will depend on the new management’s ability to execute the revised mandate and deliver improved performance, justifying the fund’s high yield and restoring investor confidence. The broader implications of these changes within BlackRock’s CEF portfolio and the wider CEF industry remain to be seen, as investors closely monitor the evolving performance and strategic direction of these funds. The interplay between activist pressure, market volatility, and management decisions will continue to shape the future of these investment vehicles.
