BMEZ CEF: Attractive Discount In This Beaten Down Name (NYSE:BMEZ)

Written by Nick Ackerman, co-produced by Stanford Chemist. This article was originally published for members of the CEF / ETF Income Laboratory on June 10, 2022.

With our recent update to BlackRock Science & Technology Trust II (BSTZ), only it seems appropriate to make an update for the sister fund, BlackRock Health Sciences Trust II (NYSE: BMEZ). BMEZ is struggling for many reasons similar to those of BSTZ. However, it has a health approach and the biotechnology sector has suffered a blow. As the name of biotechnology suggests, it is an area of ​​technology. As this means growth, we have seen the bottom fall. No one wants investment growth right now while rates are going up, especially when the last inflation The number was hot again.

That said, I think we are looking for a much more attractive price for BMEZ. Combining that with the pretty attractive fund discount, I think BMEZ is a fair option to consider picking them up at these levels. Similar to BSTZ, I’m not sure when a bounce will occur, but it could be rewarding if you can handle higher risks in the long run. This is a change from my previous update: I liked the background, but was left with a “Retention” rating. I will now change it to a “Purchase” score. That’s not to say it has a good performance soon, of course. It reflects that I think there is more than a 50% chance that it will be higher in the next year or two.

The basics

• 1-year Z score: -1.25
• Discount: 12.62%
• Distribution yield: 10.39%
• Expenditure ratio: 1.3%
• Leverage: N / A
• Assets under management: $ 2,149 million
• Structure: Deadline (settlement scheduled for January 29, 2032)

BMEZ “intends to invest up to 25% in private companies.” It intends to do so through “at least 80% of its total assets in equity securities of companies engaged primarily in the group of health sciences and equity derivatives industries with exposure to the group of science industries of health “. With this, you also use an options strategy.

It was last reported that 24.14% of the portfolio was overwritten. This is below its target range of 30% to 40% and would indicate a bullish position. In retrospect, if they were more aggressive in this strategy, they could have made up for the losses a little more.

At this point, keeping a lower percentage overwritten seems appropriate, so positions are not canceled during a bounce. Of course, it’s always a bounce like that. It could take a while to overcome the pressures of higher interest rates and see the other side when inflation starts to cool.

The fund has a term structure that will allow the fund to be liquidated around January 29, 2032. They can be changed to a perpetual fund after a 100% takeover bid for 100% outstanding shares. of the NAV. If there are still $ 200 million in total net assets, the board can become a perpetual structure. After that point, there will be no more support to keep the fund in your NAV.

Of course, it is unrealistic to believe that there will be no change in the price of the fund and the NAV over the next ten years. It is something that needs to be monitored and can be used closer to the end date of the fund. Ideally, the NAV and the price should go up from the current levels.

The term structure prevents the fund from trading with a perpetual discount. If the fund works well, it will probably continue to work. After the launch of the fund, he made some significant moves that certainly helped to give him a good start towards this goal.

Performance – Attractive discount

An interesting note is that BMEZ is now larger than BSTZ. Both are large-sized funds, as BlackRock (BLK) tends to produce large funds. Thanks to their massive size, they have many channels to sell. This change was the result of BMEZ holding relatively better than BSTZ. While BMEZ still has private stakes in smaller, biotechnology-related businesses, they also have some exposure to traditional healthcare. This seems to have provided some shelter, relatively speaking.

Below we see the YTD results between BMEZ and BSTZ (just for fun, as it is not comparable) and the SPDR S&P Biotech ETF (XBI). As we can see, BMEZ holds up much better than if it were a game biotech fund. This is to be expected and helps to emphasize that, despite the remains we are seeing, not everything is bad news.

The comparison between the total share price and the total return of the NAV has also produced a growing discount for the year. We are not yet exactly at the widest discount, but significantly below the average discount. It could still be seen as a relatively new background, so the story is pretty short.

Distribution – Juicy, but very careful yield

Something we mentioned for BSTZ also applies here. We’ve noticed that BlackRock has just made several adjustments to its monthly CEF distributions. However, they kept BSTZ alone, and also left BMEZ alone. However, they secured the other sister fund, BlackRock Innovation and Growth Trust (BIGZ).

BlackRock announces monthly distributions, so cuts can be announced at any time. However, as they have already made several adjustments, I am inclined to hold on to the next quarter to see if there is a rebound.

When looking at BMEZ distribution coverage, it will come entirely from capital gains. The fund does not provide real net investment income. This is simply because the underlying shares do not pay sufficient amounts of dividends or interest to offset the gains. Total investment income was less than $ 6.7 million. For a fund that ended 2021 with nearly $ 3 billion in assets, it is certainly not a big driver of the fund. Therefore, we see a net loss of investment instead of NII.

With their options strategy, they could be making some money this way this year. However, in previous years, this actually caused losses for the fund. For fiscal year 2021, these were not significant losses, but they were nonetheless losses. This may result in the fund closing out positions of options with losses for not having the underlying name removed.

For tax purposes, despite the lack of income generated by the fund, it is mainly taxed on ordinary income types. At least for the last two years. I suspect that in the long run, we will see long-term capital gains as the main tax characterization of distribution. We are also likely to see a return on capital this year or next due to losses that could occur during this year. We will get a better idea with the next Half-Yearly Report.

The reason we see that it is classified as ordinary income would apparently come from short-term capital gains that are grouped together with ordinary income.

BMEZ portfolio

BMEZ is similar to BSTZ and BIGZ because they have a private investment sleeve. They aim for up to 25% in private securities. However, they are not limited to any specific geography or market capitalization. This fund favors US investment, with its allocation of ~ 76% in US-based names. Because private investment is generally smaller, we see some exposure to small- and mid-cap names.

Where they are restricted or focused, however, is the healthcare space. When we look at the sector’s exposure, we see an overwhelming allocation to the two main health-related spaces.

The weights here do not change drastically. Since the last time we analyzed the fund in late January 2022, there has been no significant change.

In their private investments, biotech companies were the majority of these offers.

We can see that they have only left three of these positions, all three have been publicly traded during the time they have held them. This would be Oak Street (OSH), Taysha Gene Therapies (TSHA) and Olema (OLMA). Because TSHA and OLMA are biotechnology companies, they can really highlight the great impact this space has received.

They are down to a penny stock territory priced at $ 4.01 at OLMA and TSHA at $ 3.32.

The current top ten names show a little more promise, though some of these are also biotech names.

All of them are also listed on the stock exchange. This is interesting if you consider that BSTZ has a good handful of its largest holdings as private positions.

Quest Diagnostics (DGX) is doing the worst of this group of names. They are a stock of health services that provide information and diagnostic services, as the name implies.

Conclusion

Personally, nothing in this portfolio is anything I would have individually or even in general in my normal investment process. That’s why I feel comfortable with my BMEZ position to add diversification to my portfolio. Even though growth is at a disadvantage, I don’t mind having patience for a possible rebound. Distribution is likely to be in jeopardy at current levels unless we see a rapid change. However, he is expected to pay something at least while he waits. I think the latest discounts and sales are making this a more attractive share overall and it’s worth adding to it right now. That is, if one is comfortable with exposure to a riskier area of ​​the market.