This Income Play Is a Perfect Hedge for a Sluggish Market

|September 18, 2023

After a shaky open, stocks are up today as investors weigh what the Fed will announce at the next Federal Open Market Committee (FOMC), which is scheduled for Tuesday and Wednesday.

I expect the Fed will pause on any rate hikes this time around, but I do anticipate we’ll hear some hawkish commentary regarding the remainder of the year, considering the August core CPI increased by 4.3%. Although this was down from 4.7% in the prior month, it remains well above the Fed’s target of 2%. With inflation still above 4.0%, it’s crucial to focus on income-producing investments for your portfolio.

As always, one of my favorite methods for generating income is through closed-end funds (CEFs), especially when two things are true: the fund is trading at a significant discount to its net asset value (NAV), and it’s providing high yields.

This week, I’m watching the BlackRock Capital Allocation Term Trust (BCAT), a closed-end fund that invests in a portfolio of equity and debt securities. It also utilizes an option-writing (selling) strategy in an effort to generate current gains from option premiums and to enhance the trust’s risk-adjusted return. The fund holds a basket of 849 positions, with an asset allocation of 56.01% in equities and the remainder in fixed income.

Regarding the sector breakdown, Information Technology, Healthcare, Financials, Consumer Discretionary, and Industrials comprise 10.76%, 7.89%, 7.57%, 7.33%, and 7.04%, respectively. In the company’s Q2/2023 commentary, it noted that technology represented the sector with the largest increase over the quarter, focusing on enterprise software providers and companies that may benefit from the proliferation of artificial intelligence (AI). Within AI, exposure is centered on infrastructure providers positioned to power growth across open AI platforms.

Currently, 13.13% of the portfolio has been “overwritten”, which represents the portion of the portfolio covered by written call options, used to enhance portfolio returns. Not only does BCAT hold a portfolio of publicly traded equities and fixed income, but it has also built its allocation of private investments to 11.3% (as of 6/30/2023) and expects long-run exposure to be around 25%.

This exposure to private investments makes BCAT interesting because it grants investors access to a market segment typically reserved for hedge funds, institutions, and high net-worth investors. At the current price, BCAT is not only trading at a significant -14.42% discount to its NAV, but it also delivers a massive 10.57% yield.

Shah Gilani
Shah Gilani

Shah Gilani is the Chief Investment Strategist of Manward Press. Shah is a sought-after market commentator… a former hedge fund manager… and a veteran of the Chicago Board of Options Exchange. He ran the futures and options division at the largest retail bank in Britain… and called the implosion of U.S. financial markets (AND the mega bull run that followed). Now at the helm of Manward, Shah is focused tightly on one goal: To do his part to make subscribers wealthier, happier and more free.