BDJ CEF: good vehicle to take advantage of the rotation of technology to value
The BlackRock Enhanced Equity Dividend Trust (NYSE:BDJ) has current income as its primary investment objective, with a secondary objective of long-term capital appreciation. The fund seeks to achieve these objectives by investing in common stocks that pay dividends and offer the potential for capital appreciation. The fund uses a covered call option strategy on a single stock to enhance the dividend yield. BDJ invests at least 80% of its total assets in dividend-paying stocks. The fund has achieved impressive total returns of 12.6% and 11.7% respectively over a 5 and 10 year lookback period. The risk measures for BDJ over the same retrospective period show a standard deviation of 0.6 Sharpe and 15.11 with a maximum decline of 32% experienced during the Covid selloff. With a continued rotation from technology to value stocks, BDJ is well positioned in the CEF space to capitalize on this theme. The fund is currently trading at a discount to net asset value and offers a yield of 5.89%. With fixed income CEFs limited due to the Fed rate hike and thematic premiums to net asset value across the category, value equity CEFs are a good window to attract capital. We like BDJ as we see the Tech sell-off continuing into 2022 and capital looking for new themes to take on. The shift from technology to value is here to stay, and while it won’t be linear, it will continue through 2022. We’ve explained how we’re not overvalued bullish CEFs that are themes of overweight growth here, and we prefer value plays with strong historical returns. We are Bullish BDJ.
This section details some CEF metrics and overall fund analysis:
Leverage ratio: 0%
- Buy-write CEF, no leverage used.
Expense ratio: 0.86%
- Downstairs in the buy-write space
- Down for the asset class.
Discount/Z-Stat: -2.86% / 0.66
- The fund is trading at a discount.
- The discount is average given the statistical data on this fund.
- The fund currently sells options on 50% of its underlying portfolio
- The fund performs covered call options on a single stock
Assets under management: $1.9 billion
- The fund has a high AUM for the asset class
The fund counts financials as its largest sector exposure:
Financials have a weighting above 25% in the fund, closely followed by the healthcare sectors. These 2 main sectors essentially represent nearly half of the fund’s holdings. Information technology comes third, with a weighting of just 11.9%. In terms of individual names in the fund, the breakdown is:
The biggest US banks play a prominent role in the fund’s holdings, with a number of well-known names in healthcare also present.
BDJ has a very robust historical performance:
On a 5- and 10-year basis, the fund has rolling total returns above 10%, making BDJ a very robust buy-and-hold vehicle.
The fund only posted negative annual returns in 2018 and 2020:
As a reminder, the end of 2018 was marked by a general environment of risk aversion with a drop of nearly -20% in the stock market. 2020 has been the year of the Covid pandemic hard sell.
The fund also has a stable monthly performance, with very low average months with negative total returns over the years. An average of 5 or more months of negative returns indicates weak funds.
BDJ performed strongly during the last Fed tightening cycle in 2013-2015, although it lagged the S&P 500:
Although it underperformed the S&P 500 during the last tightening cycle in 2013-2015, the fund delivered a robust performance with a total return above 29%.
From a net asset value perspective, the fund shows an accretive value which says a lot about the fund management team:
A rising net asset value means a fund that only distributes the interest income and option premium it makes and also creates value through the naked stock positions it holds. Sometimes we see CEFs with massive NAV dropouts over the past decade, which is symptomatic of managers overdistributing just to accumulate assets under management and thereby reduce management fees.
Premium/Rebate to NAV
The fund typically trades at a discount to net asset value:
This CEF has historically traded at a discount to NAV. In the chart above, the green area signifies a discount to the daily net asset value, while a blue tint indicates a premium. The last time the fund traded at a premium to net asset value was in 2011. So what does that tell us? It highlights the fact that even though the fund moved closer to net asset value in the Fed’s monetary policy-induced zero rate environment, it never got too expensive. We are not considering an overbought vehicle here.
BDJ is an equity-focused closed-end fund that has posted very strong total returns. The fund has robust risk metrics and posted strong performance during the last Fed tightening cycle. BDJ is a good vehicle to take advantage of the big rotation from Tech to Value stimulated by the Fed tightening cycle. We’ve already explained how we’re not bullish overvalued equity CEFs that are overweight growth themes, and we prefer value plays with strong historical returns. We are Bullish BDJ.