Sell BlackRock Capital Allocation Term Trust Despite High Yield

The BlackRock Capital Allocation Term Trust (BCAT) is a $1.6 billion fund with a 22.75% yield and a 5% effective leverage. Despite activist pressure, its discount to net asset value has narrowed to 3.31%. However, it may be time to sell the fund due to its large size and potential risks.

The BlackRock Capital Allocation Term Trust (BCAT), with approximately $1.6 billion in assets under management, has been a subject of interest among investors due to its 22.75% yield and 5% effective leverage. However, recent developments have led some analysts to reconsider their stance on the fund.

Activist pressure, primarily from Saba Capital Management, has significantly narrowed the fund's discount to net asset value (NAV) from a substantial 10.89% over the past three years to the current 3.31% [1]. This narrowing discount, coupled with the high distribution yield, has been a key attraction for investors. However, several factors have led some investors to reevaluate their positions.

One of the primary concerns is the sustainability of the 22.75% distribution. Given the fund's modest leverage and unlevered investing in a mix of stocks and bonds, generating such high returns is highly questionable. Additionally, a significant portion of the fund's portfolio, around 14%, is allocated to private, or Level 3, investments. These investments carry inherent valuation and liquidity risks, which could become more pronounced if the distributions continue at their current level [1].

The fund's asset allocation is relatively balanced, with approximately half in equity and half in fixed income. The equity portion is heavily tilted towards growth and cyclical sectors, while the fixed income side has a substantial allocation to securitized products and credit [1]. The fund's overall effective duration is around 2.75 years, indicating a relatively low interest rate sensitivity.

Despite the narrowing discount, the fund's high distribution yield remains attractive. However, the current challenge is that catalysts, such as activist pressure, appear to have largely played out. Saba Capital, the catalyst for much of the positive re-rating, has been actively selling its BCAT shares recently. The tender offers, structured to keep the discount from blowing out, will have a much more muted impact when the discount is already this tight [1].

In conclusion, while BCAT remains a viable investment option, the narrowing discount and potential risks associated with the private investments may warrant a reassessment of the fund's attractiveness. The fund's high distribution yield and the activist pressure that led to it are no longer the dominant factors they once were. Investors should carefully consider these factors before making any decisions regarding their positions in BCAT.

References:
[1] https://seekingalpha.com/article/4788525-sell-blackrock-capital-allocation-term-trust-despite-22-75-percent-yield