BUI: Has It Held Up In The Downturn?
I looked at BlackRock Utility and Infrastructure Trust not too long ago. Comparing it to UTG, the big difference was the use of options versus leverage. Is that not so subtle difference playing out as expected? One of my favorite utility and infrastructure closed-end funds, or CEFs, is the Reaves Utility Income Fund (NYSEMKT: UTG ). But it’s far from the only fund out there that focuses on this space, which is why readers asked that I look at the BlackRock Utility and Infrastructure Trust (NYSE: BUI ), a much younger entrant in the space. At the time I first looked at the two together I said I liked UTG better, but that BUI theoretically should hold up better in a downturn. Well, it’s time to look at how that’s playing out. Similar, but different UTG and BUI both invest in the infrastructure that makes our modern world work. That includes electric companies, but also things like water utilities, oil companies, airports, and railroads. Both take a pretty broad look at their niche. But, in the end, they both are looking to do a very similar thing. However, that doesn’t mean their portfolios are alike. For example, at the end of June, the energy space made up around 6% of UTG’s portfolio. That number at BUI was a far more meaty 24%. So similar, but different. Which is to be expected since the CEFs are offered by two different sponsors. However, there’s another notable difference here, too. UTG attempts to enhance returns via the use of leverage. BUI looks to boost returns, specifically income, via the use of an option overlay strategy. In a flat to slowly rising market these two approaches should probably produce similar results. In a fast rising market I’d expect UTG’s leverage to result in better returns. And in a down market, I’d expect BUI’s use of options to soften the blow of the decline. That’s what I’d expect, anyway. Now that we’ve seen the utility and other income-oriented sectors fall this year, what really happened? A mixed bag Year to date through August, the net asset value, or NAV, total return for UTG was a loss of 9.3%. BUI’s loss over that same span was a more mild 6.7%. On an absolute basis that’s not such a big difference, but on a percentage basis BUI “outdistanced” (perhaps under-lost?) UTG by around 25%. That’s a pretty big difference. All return numbers assume the reinvestment of distributions. So, on the whole, I’d say that the option overlay did perform as expected. To stress the point, the Vanguard Utilities ETF (NYSEARCA: VPU ) was also down over 9% over the year-to-date period through August. But pull back some and things get a little more interesting. Over the trailing year through August, VPU was essentially break even. UTG, meanwhile, was down 3.3%. BUI was down roughly 5.5%. What gives? For starters, both UTG and BUI have broader investment mandates than VPU. And UTG and BUI are stock pickers, using human intelligence (or not, depending on your opinion of active management) to select stocks. Put another way, VPU has a much tighter focus on utilities. It also doesn’t use leverage, which through a good portion of the time was a drag on UTG’s performance. So I can understand why it did better than BUI and UTG over the trailing year, which has been a pretty turbulent time in the markets for some of the additional areas in which these two CEFs have ventured. But why has BUI underperformed UTG by so much over the trailing year? The answer is most likely the previously mentioned weighting difference in the energy sector. Oil prices, and the stocks associated with the energy sector, started to fall around mid-2014. So, it makes sense that BUI, with a much heavier weighting in the sector, would be hit harder over the trailing year period. And it’s hard to say that the oil downturn is over, yet, either. Which adds a notable amount of risk to owning BUI relative to UTG. Who wins? So, in the end, this difficult period isn’t a clear win for BUI or for UTG. It kind of depends on what period you’re looking at and how you define success. For example, looking even further afield, BUI was down 5.5% over the past year, but that was much better than the Vanguard Energy ETF (NYSEARCA: VDE ) which was down over 30% even though BUI underperformed utility-focused VPU, which was pretty much break even over the span. If you liked the extra oil exposure BUI offered versus UTG when oil was doing well, it’s hard to complain when it starts to work against you. And then there’s this year, when utilities took a hit and UTG underperformed relative to BUI. With leverage adding a helping hand to the downside along the way at UTG and option income softening the blow at BUI. So the use of options did, indeed, appear to do what you’d expect. I still like UTG. It’s a solid fund with a long history of navigating volatile markets and rewarding shareholders along the way. BUI is really seeing its first serious stress test. That said, I think it’s holding up pretty well. And, at the end of the day, I don’t think either is a poorly run CEF. Looking at the two today, UTG’s discount is narrower than normal at around 2%-about half the normal 4% or so over the trailing three years. It isn’t cheap, but then investors are likely rewarding it for its strong historical performance. A flight to safety, if you will. BUI, meanwhile, is trading at a roughly 13% discount versus its trailing three-year average discount of 9.5% or so. It’s clearly the cheaper of the two funds. BUI is also offering a more generous distribution yield, at 8.6%. UTG’s distribution yield is a more modest 6.4% or so. Neither is outlandish, but UTG’s lower yield is likely to be more sustainable over the long-term. That said, if you are looking for yield and prefer wider discounts, BUI looks like the better play-but only if you believe the oil market has stopped falling… If you are conservative, UTG is still the one to watch. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.