In this article, BlackRock Credit Allocation Income Trust (New York Stock Exchange: BTZ) closed-end funds. Due to its leverage advantage, this fund can be trusted to offer high current yields without sacrificing credit. quality. However, you should have an asset allocation plan in place to prepare for the inevitable volatility.
BTZ is a fixed income CEF, offering diversified exposure to a global portfolio of mostly investment grade fixed income. It should be noted that the fund’s leverage is 33%, so there is a significant allocation to long-term bonds and junk bonds. As we will see later, the resulting portfolio is highly sensitive to interest rate changes and economic cycles.
Since the primary objective of investing in CEF is to collect current high yields, the financial situation should be reviewed to determine whether current and future distributions can be relied upon.
While past performance is no guarantee of future results, you know the BTZ is battle-tested. After experiencing several economic shocks and changing rates, they have actually increased their distribution which is unusual for this type of investment vehicle.
In fact, according to BTZ’s annual report, the majority of the distribution comes from bond interest rather than disruptive capital returns.
Digging deeper, the trend is also very positive for BTZ. Net interest income has been very stable over the years and is well distributed by NII alone. Its significance is that shareholder dilution is less likely because the fund manager does not need to raise capital or debt in times of trouble.
Risks and hedging methods
So far, we’ve praised BTZ and BlackRock, but the fund is not without risk. Between the use of leverage, long-term security exposure, and some junk bond holdings, portfolio performance can be highly volatile. In fact, as of this writing, BTZ is down 35% from his YTD, and even if the yield is 10% he won’t be able to prevent a loss. Additionally, CEF can be difficult due to low trading volume and lack of choice.
Luckily, here are some pointers to help you overcome these challenges and enjoy a rewarding investment.
- Appropriate investment period
As you can see from the Tradingview chart above, BTZ has historically been negatively correlated with long-term government bonds. Volatility can actually be your biggest benefactor if you have the time and patience to grow your investment. Regular rebalancing allows you to buy low and sell high.
Of course, government bonds are also rate sensitive, so even with regular rebalancing the portfolio performance will not be perfect. In other words, both positions can fall when interest rates rise.
All things considered, if given time to grow and well-diversified, BTZ can be a great option for achieving high income and capital growth. It’s established and can certainly be relied upon for distribution in the future.