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Written by Nick Ackerman, co-produced by Stanford Chemist. This article was originally published to members of the CEF/ETF Income Laboratory on June 10, 2022.

With our recent update on BlackRock Science & Technology Trust II (BSTZ), it only does seems appropriate to make an update for the sister fund, BlackRock Health Sciences Trust II (NYSE: BMEZ). BMEZ is struggling for similar reasons as BSTZ. However, it is focused on healthcare and the biotech sector has taken a hit. As the name suggests, this is a technological field. Since that means growth, we saw the fund crash. No one wants growth investments right now as rates rise, especially when did the last inflation the number came hot once again.

That being said, I think we are aiming for a much more attractive price for BMEZ. Combining this with the fund’s discount being quite attractive, I think BMEZ is a fair option to consider taking back at these levels. Similar to BSTZ, I don’t know when a rebound will occur, but it could prove rewarding if you can handle higher risks in the long run. This is a change from my previous update: I liked the fund, but was sticking to a “Hold” rating. I will return this to a “Buy” rating now. That doesn’t mean it will work well soon, of course. This reflects the fact that I believe there is more than a 50% chance that it will be higher within a year or two.

The basics

  • Z-score over 1 year: -1.25
  • Discount: 12.62%
  • Distribution yield: 10.39%
  • Expense ratio: 1.3%
  • Leverage: N/A
  • Assets under management: $2.149 billion
  • Structure: Temporary (early liquidation on January 29, 2032)

BMEZ “seeks to invest up to 25% in private companies”. It intends to do this through “at least 80% of its total assets in equity securities of companies primarily engaged in the health sciences and equity derivatives group of industries with exposure to the group of ‘health science industries’. Along with this, he also uses an options strategy.

It was last reported that 24.14% of the wallet was crushed. This is below its target range of 30% to 40% and would indicate a bullish position. In hindsight, if they had been more aggressive in this strategy, it might have made up for the losses a bit more.

At this point, it seems appropriate to keep the crush percentage lower, so that positions don’t get canceled on a bounce. Of course, that’s whenever such a rebound could happen. It could take some time to push through the pressures of higher interest rates and see through to the other side when inflation starts to subside.

The fund has a term structure which will see the fund potentially liquidated around January 29, 2032. They can switch to a perpetual fund after a takeover bid for 100% of the outstanding shares at 100% of net asset value. If there are still $200 million in total net assets remaining, the board can transition to a perpetual structure. After this point, there will be no more support to hold the fund at its net asset value.

Of course, it is unrealistic to believe that there will be no change in the price and net asset value of the fund over the next ten years. This is something that should continue to be monitored and can be taken advantage of closer to the fund’s termination date. Ideally, we would see NAV and prices increase from current levels.

The term structure prevents the fund from trading at a perpetual discount. If the fund performs well, the fund will likely continue to perform. After the launch of the fund, he took important steps which certainly helped to give him a good start towards this goal.

Performance – Attractive discount

An interesting note is that BMEZ is now larger than BSTZ. Both are large funds, as BlackRock (BLK) tends to produce large funds. Thanks to their massive size, they have many sales channels. This change is the result of relatively better resistance from BMEZ than from BSTZ. Although BMEZ still has private stakes in smaller, more biotech-related companies, it also has exposure to traditional healthcare. It seems to have provided some shelter, relatively speaking.

Below we see the YTD results between BMEZ and BSTZ (just for fun, as it’s not comparable) and the SPDR S&P Biotech ETF (XBI). As we can see, BMEZ is holding up much better than if it were a pure-play biotech fund. That’s to be expected and it helps to emphasize that despite the wreckage we see, it’s not all bad news.

Chart

Y-Charts

The comparison between the total share price and the total net asset value return also produced a growing discount for the year. We’re not exactly at the widest discount yet, but well below the average discount. It could still be considered a relatively new fund, so the story is rather short.

Chart

Y-Charts

Distribution – Juicy yield, but very cautious

Something we mentioned for BSTZ also applies here. We have noted that BlackRock has just made several adjustments to its monthly distributions for CEFs. However, they held BSTZ alone, and they also left BMEZ alone. Yet they got the other sister fund, BlackRock Innovation and Growth Trust (BIGZ).

BlackRock announces distributions monthly, so cuts can be announced at any time. However, since they have already made several adjustments, I am leaning towards waiting for the next quarter to see if there is a rebound.

BMEZ distribution history

BMEZ distribution history (CEFConnect)

With regard to the coverage of the distribution of BMEZ, it will come entirely from capital gains. The fund does not provide any actual net investment income. This is simply because the underlying holdings are not paying enough dividends or interest to offset the profits. Total investment income was less than $6.7 million. For a fund that ended 2021 with nearly $3 billion in assets, that’s certainly not a big driver of the fund. Therefore, we see net investment losses rather than NIIs.

BMEZ Annual Report

BMEZ Annual Report (Black Rock)

With their options strategy, they could generate gains this way this year. However, in previous years, this actually resulted in losses for the fund. For fiscal year 2021, these were not significant losses, but they were losses nonetheless. This may result from the fund closing options positions at a loss so that the underlying name is not recalled.

BMEZ Annual Report

BMEZ Annual Report (Black Rock)

For tax purposes, despite the lack of income generated by the fund, it is taxed primarily at ordinary income rates. At least for two years. I assume that in the longer term, we will see long-term capital gains as the main tax characteristic of the distribution. We are also likely to see a return of capital this year or next due to losses that may be realized during this year. We will have a better idea with the next half-yearly report.

BMEZ Annual Report

BMEZ Annual Report (Black Rock)

The reason we consider it ordinary income would apparently come from short-term capital gains that are lumped in with ordinary income.

BMEZ portfolio

BMEZ is similar to BSTZ and BIGZ because they have a pocket of private investments. They target up to 25% private stocks. However, they are not limited to a specific geography or market capitalization. This fund favors US investments, with its allocation of around 76% in US-based securities. As private investments are generally small companies, we see some exposure to small and mid caps.

BMEZ Market Cap Weighting

BMEZ Market Cap Weighting (Black Rock)

Where they are limited or concentrated, however, is the healthcare space. When we look at industry exposure, we see an overwhelming allocation to the two major healthcare-related spaces.

BMEZ Industry Weighting

BMEZ Industry Weighting (Black rock)

The weights here do not change drastically. Since we last reviewed the fund towards the end of January 2022, there have been no significant changes.

In their private investments, biotech companies accounted for the majority of these transactions.

BMEZ Private Holdings

BMEZ Private Holdings (Black Rock)

We can see that they only exited three of those positions, all of which became publicly traded during the time they held them. That would be Oak Street (OSH), Taysha Gene Therapies (TSHA), and Olema (OLMA). TSHA and OLMA being biotech companies, can really point out how badly this space has been battered.

They are in penny stock territory with a price of $4.01 on OLMA and TSHA at $3.32.

Chart

Y-Charts

The current top ten names are a bit more promising, although some of them are also biotech names.

BMEZ Top 10

BMEZ Top 10 (Black Rock)

They are also all listed on the stock exchange. This is interesting considering that BSTZ holds a handful of its largest holdings as private positions.

Chart

Y-Charts

Quest Diagnostics (DGX) performs the worst of this group of names. It is a health service stock that provides information and diagnostic services – as the name suggests.

Conclusion

Personally, nothing in this portfolio is something that I would hold individually or even generally in my normal investment process. This is partly why I am comfortable using my BMEZ position to add diversification to my portfolio. While growth is no longer in vogue, I don’t mind being patient for an eventual rebound. Distribution is likely in jeopardy at current levels unless we see a quick turnaround. However, it is expected to pay something at least in the meantime. I think the latest discounts and liquidations make this a more attractive position overall and worth adding to at this time. In other words, if one is comfortable with exposure to a riskier area of ​​the market.