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

BlackRock is actively defending its closed-end funds against Saba Capital Management, emphasizing the value created for shareholders through steady distributions, discount management, and rigorous board oversight.

Summary

• BlackRock is addressing concerns regarding its closed-end funds (CEFs) and defending against actions by Saba Capital Management.
• BlackRock emphasizes its commitment to shareholders through steady distributions, discount management, and robust risk management.
• The document highlights the qualifications and independence of the current board members compared to Saba's nominees.
• It details specific actions taken to improve fund performance and reduce discounts to NAV, such as share repurchase programs and distribution rate increases.
• The document also points out potential conflicts of interest and negative outcomes associated with Saba's involvement in other CEFs.
• BlackRock manages numerous funds, the majority of which are performing well and many trade at a premium; however, some trade at a discount.
• The contested CEFs have 294,861 beneficial holder accounts with an average position size of ~$32K.
• The median income of all CEF shareholders is $104K, and the average age is 60+ years.
• BlackRock has repurchased significant amounts of shares through open market repurchase programs, driving accretion in NAV for several funds.
• For example, BCAT repurchased $78mm of shares (4.56% O/S) driving $13.3mm accretion in NAV.
• ECAT repurchased $55mm of shares (3.61% O/S) through open market repurchase, driving $10.8mm accretion in NAV.
• BIGZ repurchased $177mm of shares (7.77% O/S) through open market repurchase, driving $35.5mm accretion in NAV.
• BMEZ repurchased $96mm of shares (5.46% O/S) through open market repurchase, driving $17.7mm accretion in NAV.
• BSTZ repurchased $42mm of shares (3.16% O/S) through open market repurchase, driving $8.5mm accretion in NAV.

Sentiment

Score: 7

Explanation: The document presents a generally positive view of BlackRock's CEFs, emphasizing value creation and shareholder protection. However, the ongoing proxy contest with Saba Capital introduces uncertainty and potential risks, tempering the overall sentiment.

Positives

• BlackRock has a long history of innovation and client focus in the CEF space.
• The Funds Boards are genuinely independent and focused on shareholder interests.
• BlackRock has taken proactive steps to address trading discounts, including share repurchases and distribution increases.
• Several funds have outperformed their peers and benchmarks.
• BlackRock's engagement with shareholders, such as the settlement with Karpus Management, has resulted in positive outcomes.
• BlackRock CEFs offer unique benefits such as steady distributions, access to private investments, and daily liquidity.
• BlackRock has a robust risk management system supported by 19,000+ professionals.
• BlackRock has implemented limited term structures with guaranteed liquidity at NAV for several funds.
• BlackRock has reduced management fees for some funds.
• BlackRock has waived fees on preferred shares for some funds.

Negatives

• Some BlackRock CEFs trade at a discount to NAV.
• Saba Capital Management is attempting to gain control of the boards of several BlackRock CEFs.
• Saba's nominees are considered less qualified and potentially conflicted.
• Saba has a questionable track record of managing CEFs, with examples of increased fees and underperformance.
• Saba has rejected settlement offers that would have provided substantial liquidity to all shareholders.
• Saba failed to submit proxies at annual meetings, potentially hindering quorum achievement.
• BIGZ was launched near the market peak for SMID-cap growth stocks from a public perspective.
• The private portfolio has also weighed on performance given markdowns on private equity investments in the portfolio for BIGZ.
• BSTZ's performance was impacted by the Trusts significant allocation to private equity where valuations have lagged public markets.

Risks

• Saba Capital's actions could disrupt fund strategies and negatively impact shareholder value.
• Market volatility and interest rate changes could affect fund performance and discounts.
• The Funds are inherently more vulnerable to opportunistic investors than operating companies because of the arbitrage opportunities and the smaller market capitalizations.
• Forced liquidations of positions can hurt all shareholders; especially acute for private investments.
• Uncertain stewardship from Saba only has 52 employees and 19 investment professionals.

Future Outlook

The document does not provide specific forward-looking statements but emphasizes BlackRock's commitment to enhancing shareholder value and protecting shareholder interests.

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 are confident the Board will be able to find a thoughtful and capable manager for significantly less than what Voya is currently charging.

Industry Context

This announcement is occurring within the context of increased activist investor activity in the closed-end fund space, with Saba Capital Management being a prominent player. The document positions BlackRock as a responsible steward of capital, contrasting its approach with what it characterizes as Saba's self-serving tactics.

Comparison to Industry Standards

• The document compares the performance and discounts of BlackRock CEFs to their peer groups, highlighting instances of outperformance and narrower discounts.
• It also references specific competitors such as ARK Innovation ETF (ARKK) and Baillie Gifford US Discovery Fund (BGUIX) for BIGZ.
• The document notes that BlackRock's expense ratios are among the lowest in the peer group for several funds.
• The document compares BlackRock's governance practices to those of other CEFs and highlights that its quorum requirements track market practice.
• The document compares BlackRock's funds to those managed by Saba, highlighting BlackRock's consistent fund strategy, competitive fees, and tax-efficient distributions.

Stakeholder Impact

• Shareholders are directly impacted by the outcome of the proxy contest and the fund's performance.
• Employees of BlackRock are affected by the firm's reputation and success in managing the CEFs.
• Customers and financial advisors are impacted by the stability and performance of the BlackRock CEFs.

Next Steps

• Shareholders are urged to vote in favor of BlackRock's nominees for the board of directors.
• The Funds Boards will continue to monitor fund performance and implement strategies to reduce discounts and enhance shareholder value.
• BlackRock will continue to engage with shareholders to address their concerns and find reasonable solutions.

Key Dates

Keywords

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