My objective with this thesis is to assess whether an investment in the BlackRock International Growth & Income Trust (NYSE: BGY) makes sense at this point.
The closed end fund (“CEF”) suffered a drop of more than 23% during the last year, as seen in the chart below, falling to a low of $4.40. It saw a slight rise to $4.60 during this week, and that coincided with the greenback, represented here by the Invesco DB US Dollar Bullish (UUP), hesitating slightly as shown in the orange graph
BGY’s inverse correlation to the dollar shown here for a three-year period needs further investigation for investors wishing to take a position in the trust. Thus, I begin by outlining why the greenback has shown signs of weakness and whether that could be sustained.
The trajectory of the dollar linked to the actions of the Fed
On Tuesday, October 4, new job postings for the month of August fell by ten% compared to July, indicating that companies have reduced their human resources budgets, possibly due to fears of an economic slowdown. Now, the job count is precisely the type of indicator the Federal Reserve is looking to gauge to see if its fight against high inflation is starting to bear fruit.
For investors, strong economic growth often accelerates hiring and drives up wages for employees as they produce more to meet demand. Now, millions of employees have benefited from higher disposable income thanks to the post-pandemic recovery, which in turn has stimulated demand for goods and services, which has increased their prices. This, in turn, leads to cost inflation, exacerbated by the Ukrainian conflict.
Seen in this light, the low number of job openings implied a pause in the scorching economy and, in turn, a rise in inflation that could prompt the Fed to become more dovish. As a result, global stock markets rose on Tuesday and Wednesday, with the dollar falling as seen in the chart above.
However, the market has given up some of its gains as uncertainty reigns again, as the unemployment figures released on Friday October 7 showed that more people are employed. This means that the Fed has yet to raise interest rates and there is no impetus for the dollar to stop its relentless rise against all currencies in the world.
In this regard, the economies of developed countries where most BGY assets originate as shown in the table below also suffer.
Geographically, the underlying fund of the trust has exposure of 27.13% to the United Kingdom and 18.21% to France. In third place comes the United States, with 9.03%.
Therefore, in addition to currency risks, BGY’s price development has also been affected by recent developments in the UK economy, notably due to a proposed tax cut by the new government. . Thus, the stock market was volatile in the last week of September, and had it not been for a few timely action by the Bank of England, chances are there was carnage. Other European markets such as France also suffered from the contagion effect.
Aloud, the bearish trend for the BlackRock trust is likely to continue. But, in addition to the rhetoric of capital appreciation, there is also income.
Evidence of income
Trust primary the focus is on income, with capital appreciation coming second, with the goal of investing 80% of assets in non-US companies that pay high dividends. Today, most of us are used to “dividend aristocrats,” or those who not only pay dividends every year, but have also consistently increased distributions in each of the past 25 years. On the other hand, European companies seem to have a more flexible approach, cutting dividends in times of economic difficulties to resume payments when conditions improve.
This flexibility is evidenced in the dividend history of the past five years in the chart below, showing that after declines, BGY again increased dividend payments and made payments on a monthly basis.
Looking deeper, this fund’s ability to continue to generate income is also explained by covered calls similarly to BlackRock Innovation and Growth ETF (BIGZ), which I covered last month.
Without getting too deep into the details of covered call writing or selling a call option, it allows for gains by taking advantage of market momentum. Some use it to earn income while others use it to hedge against market volatility. In the case of BGY, as evidenced by its downward trend and continued dividends, this is income. Thus, the cash bonuses it obtains from the sale of options are added to the distributions made to shareholders with the investment income (capital gains and dividends from participations).
Now, covered calls are part of what is called options strategy, whereby the trust writes a covered call against the position of a security already held. To this end, the trust managers had a portfolio made up of 35 shares as of August 31 whose market capitalizations may vary. Of these, 30% to 45% of its total assets are used either for writing covered call options or putting options. In this case, the trust has an obligation to buy at a certain strike price or at the price agreed with a counterparty.
Risks and preservation of capital
Now, one of the risks of this strategy is that it doesn’t necessarily work in all market conditions, especially during bull markets. An example is when the value of the stock against which the covered call option was written climbs significantly above the strike price. This results in a sold option or a sale to the counterparty with a gain consisting of the option premium and the price appreciation. However, the price at which the option is executed may be lower than the actual market value of the stock at that time, thus depriving the trust of the benefit of the additional stock appreciation.
This implies that selling options is best during flat market or falling markets, and may be why when the market went down from March 2020, and many companies cut or suspended dividend payments due to the uncertainty caused by the Covid lockdown measures, the trust has increased and maintained its dividend payouts.
Additionally, keeping in mind BGY’s second objective, which is capital appreciation, which in today’s highly volatile market conditions should rather be called capital protection or capital preservation, I compare its price performance with the Vanguard FTSE Developed Markets ETF (VEA) and BlackRock Institutional Trust Company NA – BTC iShares Core MSCI EAFE ETF (IEFA). Both of these companies hold developed market stocks.
I made the comparison for three-year (top chart) and one-year (bottom chart) periods.
The results show that BGY only appreciated by 19%, as shown in the blue chart, compared to the two passively managed exchange-traded funds (ETFs), which generated gains greater than 30% from March 2020 to November 2021, or during a period that has been bullish for the stock market.
In contrast, the trust has performed worse or better in relative terms, providing better capital protection than the other two funds over the past year, or in a period that has been marked by a much higher degree of volatility. raised.
Volatility is expected to persist on the strength of the dollar and rising energy costs, given Saudi Arabia’s hawkish stance on oil prices. Moreover, there is still uncertainty in the UK where the finance minister is trying to regain the trust members of his party.
In light of these, it is better to be patient amidst all this market turmoil and wait for a better margin of entry.
So for those waiting to buy the dip, actively managed BGY, which charges a much higher fee of 1.09% compared to VEA and IEFA, pays a distribution yield of 8.69%, all of this is made possible through the selection of appropriate holdings and a covered call strategy.
Finally, while the charts show that BlackRock’s confidence may provide some degree of volatility protection, the future remains very uncertain, especially after the latest unemployment report.