DEFA14A: BlackRock Defends Closed-End Funds Against Saba Capital, Highlights Performance Improvements and Shareholder Value

BlackRock is actively defending its closed-end funds (CEFs) against activist investor Saba Capital Management, emphasizing the funds' value proposition, strong performance, and commitment to shareholder interests.

Summary

• BlackRock is presenting its case against Saba Capital Management's attempts to gain control of several of its closed-end funds (CEFs).
• BlackRock emphasizes its long history in managing CEFs since 1988, focusing on innovation and meeting shareholder needs.
• The Funds Boards are committed to protecting all shareholders, focusing on steady income and mitigating discounts.
• BlackRock highlights that most of its funds are performing well, with many trading at a premium, while acknowledging that some trade at a discount.
• The company stresses the benefits of its investment expertise, risk management, and distribution support, backed by over 19,000 professionals.
• BlackRock argues that Saba's tactics are self-serving and not in the best interests of all shareholders, aiming to profit through financial engineering at the expense of others.
• The presentation details the qualifications and experience of the current trustees, contrasting them with Saba's nominees, whom they deem unqualified and conflicted.
• BlackRock showcases the performance improvements and discount reductions achieved by the Funds Boards and management teams since 2022.
• Specific actions taken to mitigate discounts include share repurchase programs, distribution rate increases, and efforts to increase fund visibility and liquidity.
• The document provides performance snapshots for several contested funds, including BCAT, ECAT, BIGZ, BMEZ, BSTZ, BFZ, BNY, MHN, MPA, and MYN, comparing their total shareholder return (TSR) and premium/discount to NAV against peers.
• BlackRock highlights the unique features of its CEFs, such as access to private markets, guaranteed liquidity at NAV, and no upfront fees.
• The company also addresses concerns about the impact of rising interest rates on the performance of multi-asset and equity funds launched in recent years.
• BlackRock emphasizes its commitment to engaging with all shareholders and finding reasonable solutions to address their concerns, citing the recent settlement with Karpus Management as an example.
• The presentation includes a detailed comparison of Saba's actions at BRW and SABA, arguing that Saba has not delivered positive change as a manager and has instead increased fees and decreased fund ownership.
• BlackRock accuses Saba of squandering shareholder value in pursuit of self-serving goals through multi-year activism campaigns.
• The document raises questions about the independence and qualifications of Saba's nominees, highlighting their pre-existing relationships with Saba and potential conflicts of interest.
• BlackRock concludes by asserting that the current Funds Boards are the best choice for all shareholders and that BlackRock is the right manager for these funds.

Sentiment

Score: 7

Explanation: The document presents a generally positive view of BlackRock's CEFs, emphasizing their value proposition, strong performance, and commitment to shareholder interests. However, it also acknowledges the challenges posed by Saba Capital Management's activist campaign and the need to address discounts in some funds.

Positives

• BlackRock has a long history and established leadership in managing closed-end funds (CEFs).
• The Funds Boards are actively working to protect shareholder interests and mitigate discounts.
• Many of BlackRock's CEFs are performing well, with some trading at a premium.
• BlackRock offers substantial investment expertise, risk management, and distribution support.
• The company has taken decisive actions to improve performance and reduce discounts in its CEFs since 2022.
• BlackRock is committed to engaging with shareholders and finding solutions to address their concerns.
• The current trustees are highly qualified and have extensive experience in investment company and CEF governance.
• BlackRock has implemented various initiatives to enhance shareholder value, such as share repurchase programs and distribution rate increases.
• The company's CEFs offer unique features like access to private markets, guaranteed liquidity at NAV, and no upfront fees.
• BlackRock has a fiduciary mindset and provides unbiased advice at the core of its ethos.

Negatives

• Some of BlackRock's CEFs are trading at a discount to NAV.
• Saba Capital Management is attempting to gain control of several BlackRock CEFs, which BlackRock argues is not in the best interests of all shareholders.
• The timing of multi-asset and equity fund launches affected performance in the early years due to rising interest rates.
• Saba's nominees are considered unqualified and conflicted by BlackRock.
• Saba has a questionable track record of managing CEFs, according to BlackRock.
• Saba's actions at BRW and SABA have allegedly led to increased fees and decreased fund ownership.
• Saba has been accused of squandering shareholder value in pursuit of self-serving goals.
• There are unanswered questions about the independence of Saba's nominees due to their pre-existing relationships with Saba.

Risks

• Saba Capital Management's activist campaign could disrupt the management and strategy of the contested CEFs.
• The potential for increased fees and expenses if Saba gains control of the funds.
• The risk of changes to the investment strategy and portfolio structure that could negatively impact remaining shareholders.
• The possibility of liquidity events that could harm other shareholders.
• The risk of reputational damage due to the ongoing conflict with Saba.
• The potential for market volatility and economic uncertainty to impact the performance of the CEFs.
• The risk that private investments within the CEFs could underperform or be subject to valuation adjustments.
• The possibility that the Funds Boards may not be able to effectively mitigate discounts or enhance shareholder value.
• The risk that the Funds Boards may not be able to effectively oversee the CEFs for the best interests of all shareholders.

Future Outlook

The document does not provide specific forward-looking statements or guidance, but it implies a commitment to continuing efforts to improve performance, reduce discounts, and enhance shareholder value.

Management Comments

• BlackRock's management team as well as the funds Boards have taken more steps than most other closed-end fund managers to benefit Karpus clients as well as all shareholders of these funds.
• We approach these engagements with the goal of finding reasonable solutions to address shareholder concerns, including when those concerns are raised by institutional investors and hedge funds.

Industry Context

This announcement reflects the ongoing trend of activist investors targeting closed-end funds to unlock value and improve performance. Saba Capital Management is a well-known activist investor in the CEF space, and BlackRock's response highlights the challenges and strategies involved in defending against such campaigns.

Comparison to Industry Standards

• The document compares the performance of BlackRock's CEFs against peer medians and relevant benchmarks.
• For example, BCAT's 1-year TSR is 1,274bps higher than peers' median, and ECAT has outperformed peers' median by 2,577bps in the 1-year timeframe.
• The document also references specific competitors and industry benchmarks, such as the MSCI ACWI Index, Bloomberg US Agg Total Return Index, ARK Innovation ETF (ARKK), and Baillie Gifford US Discovery Fund (BGUIX).
• The expense ratios of BlackRock's CEFs are generally in line with or lower than their peer groups.
• The document also compares BlackRock's actions to mitigate discounts with those of other CEF managers.

Corporate Governance

Legal Proceedings

• Saba initiated costly and unnecessary litigation challenging the Funds' typical requirements, which are applicable to all shareholders.
• Delaware Supreme Court upholds actions taken by the Funds board due to the difficulty of obtaining votes in a proxy fight, despite strong support from other shareholders.

Stakeholder Impact

• Shareholders: The outcome of the proxy contest will directly impact the governance and management of the CEFs, potentially affecting their performance and value.
• Employees: The ongoing conflict with Saba could create uncertainty and disruption within BlackRock's CEF management teams.
• Customers: The performance and stability of the CEFs are important to investors who rely on them for income and diversification.
• Suppliers: The CEFs' investment activities could impact the companies and markets in which they invest.
• Creditors: The financial health and stability of the CEFs are important to their creditors.

Next Steps

• Shareholders will vote on the election of directors at the upcoming annual meeting.
• BlackRock will continue to engage with shareholders and address their concerns.
• The Funds Boards will continue to monitor performance, mitigate discounts, and enhance shareholder value.

Key Dates

Keywords

BlackRock, closed-end funds, CEFs, Saba Capital, activist investor, proxy contest, shareholder value, discount management, corporate governance, investment management