BME: Quality Healthcare Fund With 6% Income And An Attractive Discount
Khanchit Khirisutchalual
Summary
BlackRock Health Sciences Trust (NYSE:BME) is a healthcare sector-specific closed-end fund, or CEF, that invests in a fairly diversified portfolio of common stocks in the healthcare sector.
It currently provides a reasonable yield of 6.3% plus an attractive discount of close to -8% (below NAV).
BME has a very decent long-term record of nearly 19 years, matching and even exceeding the performance of the S&P 500 (SP500). However, the recent near and midterm performance has been lackluster, which is in line with the healthcare sector.
Introduction:
BlackRock Health Sciences Trust is a closed-end fund that was incepted nearly 19 years ago in Mar. 2005. The fund seeks to invest in healthcare companies with strong pipelines and potential long-term growth opportunities. It has access to the full spectrum of healthcare sector opportunities and invests across pharmaceuticals, biotechnology, medical devices, and healthcare providers. The fund also sells (writes) call options on the underlying equity portfolio, potentially reducing the fund’s volatility and generating additional income.
As per the fund’s literature,
“BlackRock Health Sciences Trust’s (the ‘Trust’) investment objective is to provide total return through a combination of current income, current gains, and long-term capital appreciation. The Trust seeks to achieve its investment objective by investing, under normal market conditions, at least 80% of its assets in equity securities of companies engaged in the health sciences and related industries and equity derivatives with exposure to the health sciences industry. The Trust utilizes an option writing (selling) strategy to enhance dividend yield.”
Other salient features of this fund are as follows:
- The fund is focused on providing total returns to its shareholders that include regular and mid-to-high monthly distributions.
- The fund uses zero leverage, which is definitely an advantage during a high-interest rate regime.
- The fund has a reasonably good record of performance when we look at the long term. However, the more recent performance is downright negative. But that has been true with most healthcare funds. Since its inception nearly 19 years ago until Jun. 30, 2024, it has returned 11.60% annually on NAV (net asset values) basis, compared to 10.30% from the S&P 500. Also, the fund has returned 10.42%, 9.15%, 3.41%, and 9.71% for the 10, 5, 3, and 1-year periods, respectively, on the NAV basis. These results assume that all distributions were reinvested.
- The fund follows a “managed” distribution policy and pays a consistent amount monthly, which currently yields 6.30%.
- As per its mandate, the fund can invest globally, but 93% of the fund’s assets are invested in healthcare securities based or listed in the U.S.
- BME is a sector-specific fund, so by nature, it is concentrated. However, it is invested in roughly 139 securities, and its top 10 represent over 48% of the total assets. Over 97% of the assets are invested in common stocks, out of which more than 54% are in the Pharma and Biotechnology segment, while 43% are invested in the Medical Instruments & Services segment. So, within the Healthcare sector, it is fairly diversified.
- As of Jul. 02, 2024, the fund under its management had roughly $611.4 million in net assets (as well as total assets).
- The fund is an actively managed fund and has an expense ratio of 1.07% (including 1% of the management fee) based on the total assets.
- As of Jul. 02, 2024, its distribution yield on the market price was 6.31% and 5.83% on the NAV.
- As of Jul. 02, 2024, BME’s market price offered a discount of -7.69% to its NAV. However, on a 3-year average basis, it has traded at a smaller discount of -1.82% and nearly flat on a 5-year average basis.
Financial Outlook:
Let’s look at the Fund’s Financial health and performance. The most recent detailed report that is available to investors is the annual report for the period of Jan. 2023 – Dec. 31, 2023. However, the semi-annual report should be due any time now.
Net Investment Income:
The net investment income (or NII in short) is the net income that a fund earns from its investment in the form of dividends, distributions, and interests or derivatives like options, minus all the fund’s expenses, including management fees, operating expenses, commissions, and interest on leverage. For equity-based funds, especially in high-growth sectors like technology, the NII is not very relevant. However, for fixed-income or bond funds, it is very relevant.
Here is what it looks like in terms of NII, Distributions, and Net Assets at the beginning and end of the statement period.
(All amounts are in US $ (except Shares Outstanding) for the 12-month period; negative amounts are shown inside parentheses,…
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