DEFA14A: BlackRock Defends Closed-End Funds Against Saba Capital's Proxy Challenge

BlackRock is actively defending its closed-end funds (CEFs) against a proxy challenge from Saba Capital Management, emphasizing the funds' value proposition for shareholders and the board's commitment to protecting their interests.

Summary

• BlackRock is presenting its case against Saba Capital Management's proxy challenge for control of several BlackRock closed-end funds (CEFs).
• BlackRock emphasizes its long history in managing CEFs since 1988, focusing on innovation and meeting shareholder needs.
• The Funds Boards aim to protect all shareholders, focusing on steady income and mitigating discounts.
• BlackRock argues that Saba's tactics are self-serving and not in the best interests of all shareholders, and that Saba's nominees are unqualified and conflicted.
• BlackRock highlights the unique benefits of CEFs, including consistent distributions, diversification, access to private markets, and intraday liquidity.
• The presentation details the characteristics of the contested CEFs' shareholders, noting an average position size of ~$32K, a median income of $104K, and that approximately two-thirds of shareholders are over 60 years old.
• The Funds Boards have taken decisive actions to improve performance and reduce discounts, including share repurchase programs and distribution rate increases.
• BlackRock emphasizes that the current trustees are more qualified than Saba's nominees, citing their independence, experience, and focus on shareholder interests.
• The presentation includes performance snapshots for each of the contested funds, comparing their total shareholder return (TSR), premium/discount to NAV, distribution growth, and expense ratio to peer medians.
• BlackRock argues that Saba's actions as a manager have not delivered positive change, citing examples of increased fees and underperformance at funds previously managed by Saba.

Sentiment

Score: 6

Explanation: The document presents a mixed sentiment. While it highlights positive aspects like proactive discount management and strong distribution growth, it also addresses challenges such as discounts to NAV and the proxy contest with Saba Capital. The overall tone is defensive, aiming to reassure shareholders and defend the current board's actions.

Positives

• BlackRock has a long history and established leadership position in managing closed-end funds (CEFs).
• The Funds Boards are focused on protecting shareholder interests and providing steady income.
• The Funds Boards have taken proactive steps to improve performance and reduce discounts, such as share repurchase programs and distribution increases.
• BlackRock emphasizes the unique benefits of CEFs, including diversification, access to private markets, and intraday liquidity.
• The current trustees are highly qualified and independent, with extensive experience in investment management and corporate governance.
• Several of the contested funds have outperformed their peers over various timeframes.
• BlackRock has engaged constructively with shareholders, as exemplified by the settlement with Karpus Management.
• The Funds Boards have implemented discount management programs, including share repurchases, to enhance shareholder value.
• Expense ratios for several funds are among the lowest in their peer groups.
• Distribution rates have increased significantly for several funds in the past year.

Negatives

• Some of the contested funds trade at a discount to NAV.
• The timing of multi-asset and equity fund launches affected performance in the early years due to rising interest rates.
• Private investments in some funds have weighed on performance due to markdowns.
• Saba Capital Management is challenging the current board, creating uncertainty and potentially disrupting fund strategies.
• BlackRock argues that Saba's nominees are unqualified and conflicted, potentially harming shareholder interests.
• BlackRock claims that Saba has a questionable track record of managing CEFs, citing increased fees and underperformance at funds previously managed by Saba.

Risks

• The proxy contest initiated by Saba Capital Management could lead to changes in fund management and strategy.
• Saba's self-serving tactics could harm other shareholders.
• The Funds Boards believe that Saba's nominees are unqualified and conflicted.
• Market fluctuations and economic conditions could impact fund performance and NAV.
• Discounts to NAV could persist or widen, impacting shareholder returns.
• Changes in interest rates could affect the performance of fixed-income CEFs.
• Private investments in some funds are illiquid and subject to valuation uncertainties.
• Potential for increased fees and expenses if Saba gains control.
• Liquidity events and changes to investment strategy and portfolio structure could negatively impact the remaining shareholders.

Future Outlook

The document highlights the ongoing efforts to enhance shareholder value through various initiatives, including discount management programs, distribution rate adjustments, and strategic reviews. The future outlook depends on the success of these initiatives and the outcome of the proxy contest with Saba Capital Management.

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.
• The Funds Boards seek to actively engage with all shareholders.
• 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 is occurring within a broader context of increased activism in the closed-end fund space, with hedge funds like Saba Capital seeking to unlock value by challenging existing management and advocating for changes such as fund liquidations or mergers. The outcome of this proxy contest could set a precedent for future activist campaigns in the CEF market.

Comparison to Industry Standards

• The document compares the performance of BlackRock's CEFs to peer medians and relevant benchmarks.
• For example, BCAT's performance is measured against a blended benchmark of 50% MSCI ACWI Index and 50% Bloomberg US Agg Total Return Index.
• BIGZ's performance is compared to ARK Innovation ETF (ARKK) and Baillie Gifford US Discovery Fund (BGUIX).
• BMEZ's performance is compared to HQL and HQH, as well as a custom index, MSCI custom ACWI SMID Growth HC Call Overwrite Index.
• The document also references Saba's performance as a manager of other CEFs, such as BRW and SABA, noting underperformance compared to previous management and peer groups.

Stakeholder Impact

• Shareholders are directly impacted by the outcome of the proxy contest and the performance of the funds.
• Employees of BlackRock and the contested funds could be affected by changes in management or strategy.
• Customers and clients of BlackRock may be impacted by the stability and performance of the funds.
• Suppliers and service providers to the funds could be affected by changes in fund operations or management.

Next Steps

• Shareholders will vote on the election of directors at the upcoming annual meetings.
• The Funds Boards will continue to engage with shareholders and implement strategies to enhance value.
• BlackRock will continue to manage the funds according to their investment objectives and policies.

Key Dates

Keywords

closed-end funds, BlackRock, Saba Capital, proxy contest, shareholder value, discount management, distribution rate, investment performance, corporate governance, municipal bonds