October 2018 Newsletter to Clients

Enjoy this month’s edition that features an update on BlackRock Floating Rate Income Trust (BGT).

 

BlackRock - As the American economy roars ahead we see the stock market move to new highs never imagined almost ten years ago. The move from a low of nearly 7,500 on the Dow Jones Industrial Average to close to 27,000 today is close to unimaginable, yet the reality. How much higher can it go? I used to predict 25,000 until I heard that Warren Buffet topped me with 30,000, and that was over one year ago.

 

Rising interest rates suggest a rising demand for money and credit. But more important, higher interest rates will cause a decline in bond prices and the money flowing out of bonds must be put to work in other asset classes like common stocks. The most encouraging predictive sign of a higher stock market is the fear of investing in the stocks. When your neighbors begin to suggest they have ‘hot’ stocks for you to buy, then one backs away. We have no such enthusiasm today. Most investors remain fearful of the market because of the horrifying 2008-2009 experience.

 

To return to the rising interest rate situation. Last week, I had the pleasure of meeting with two BlackRock executives at their NYC headquarters to discuss our floating rate income bank loan fund holdings: BlackRock Floating Rate Income Trust (BGT) and the BlackRock Floating Rate Income Strategies Fund (FRA). One executive worked on the trading floor and is responsible for credit analysis whereas the other is in charge of closed-end funds.

 

As you know, both funds increased their monthly distributions by 6% a couple of months ago. I was informed that, even with this increase, both funds are earning 104% of their distribution rate. This suggests we may see future increases in payouts. During our last conference with BlackRock, we were informed the payout was covered by 106%. The Federal Reserve has raised short-term rates twice since then, and these increases directly affect the money earned on floating rate loans. The Fed predicts another one quarter point increase will occur before the end of the year.

 

Another important point made by the member of the credit strategy team is that the fund management team is guided by a safety-first approach to investing, as opposed to an aggressive approach to chasing income. Both funds are currently yielding over 5.6% and sell at significant discount to stock price (7.9% for FRA & 8.5% for BGT). Both funds have the authority to buy back shares while the discount persists to enhance shareholder value.

 

Performance over the past ten years is impressive; FRA 6.18% & BGT 6.5% annually.

 

Bob Bova