BlackRock Revamps Tech-Focused Fund Amidst Activist Pressure and Market Volatility
BlackRock, the world’s largest asset manager, is undertaking significant changes to its tech-focused closed-end fund (CEF), the BlackRock Innovation and Growth Term Trust (BIGZ), following pressure from activist investors and a period of underperformance. This $2 billion fund, known for its high yield of around 13%, has lagged behind its peers in recent times, prompting a strategic overhaul. The move comes amidst a broader reassessment of CEFs within the investment community and coincides with market volatility, particularly in the tech sector, fueled by the emergence of competitive AI technologies from China.
The changes to BIGZ stand in contrast to BlackRock’s other tech-focused CEFs, the BlackRock Science and Technology Trust (BST) and the BlackRock Science and Technology Term Trust (BSTZ). While BST and BSTZ have demonstrated robust performance, with a combined average return of 24% over the past year, BIGZ has struggled. This discrepancy is largely attributed to BIGZ’s broader investment mandate, which includes holdings outside the core tech sector, such as military contractor Axon Enterprise and data-center servicer Vertiv Holdings. This diversified approach, while intended to capture growth opportunities, ultimately diluted the fund’s performance compared to its more focused counterparts.
BST and BSTZ, while both invested in the burgeoning field of artificial intelligence (AI), have adopted different strategies. BSTZ emphasizes high-growth potential with significant holdings in companies like NVIDIA and Astera Labs, both key players in the AI landscape. BST, on the other hand, balances its NVIDIA position with more established tech giants like Microsoft, Apple, and Amazon, providing a more stable, less volatile investment profile. This strategic divergence has allowed BlackRock to offer investors a choice between higher growth potential with higher volatility (BSTZ) and more moderate growth with lower volatility (BST).
The recent market fluctuations triggered by the launch of DeepSeek, a Chinese AI chatbot rivaling OpenAI’s ChatGPT, highlight the inherent risks in the tech sector. While both NVIDIA and Astera Labs have seen impressive gains since Astera’s IPO, the emergence of a strong competitor underlines the dynamic and potentially disruptive nature of the AI market. This emphasizes the importance of strategic portfolio diversification, as exemplified by BST’s inclusion of established tech companies alongside its AI-focused investments.
BIGZ’s underperformance has prompted a series of corrective actions from BlackRock. The fund will receive a new management team and a revised mandate, narrowing its focus back to the core technology sector. This realignment is intended to streamline the fund’s investment strategy and improve its performance relative to its peers. Perhaps the most significant change, however, is the introduction of a substantial share buyback program. This program allows shareholders to tender their shares for 99.5% of the fund’s net asset value (NAV) per share, offering a potential profit opportunity regardless of the fund’s market performance.
This buyback program represents a unique opportunity for investors. By purchasing BIGZ shares at a discount to NAV (currently around 9.1%), investors can potentially realize a 9.5% gain simply by tendering their shares through the buyback program. This return is independent of any market price appreciation. Of course, there is a risk that the fund’s NAV could decline before an investor can redeem their shares, resulting in a lower redemption value. However, if this were to occur, investors could simply choose not to participate in the buyback and continue to collect the fund’s attractive 13% dividend yield, assuming the new management team can maintain the necessary profitability to support this payout. This combination of a significant buyback program and a high dividend yield presents a compelling proposition for income-seeking investors willing to navigate the complexities of the CEF market. The success of this turnaround strategy will depend on the new management team’s ability to effectively implement the revised mandate and capitalize on the growth opportunities within the dynamic technology sector.
