BCX – Large Cap Natural Resources Equities CEF (NYSE:BCX)

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Thesis

BlackRock Resources & Commodities Strategy Trust (NYSE: BCX) is a closed-end fund whose primary objective is high current income. According to fund documentation, “The Trust will seek to achieve its investment objectives, under normal market conditions, by investing at least 80% of its total assets in equity securities issued by commodity or resource companies, derivatives exposed to commodity or natural resources or investments in securities and derivatives linked to the underlying price movement of commodities or natural resources“. Therefore, a retail investor gains exposure to the stocks of companies that derive their profits from the commodities space. Looking at the holdings distribution, we can notice that the constituents are primarily large-cap global companies that can be categorized as belonging to the large Oil & Gas group or the Mining sector.

It is important to note and understand the difference between owning oil and gas/mining stocks and owning commodities outright (either through an ETF or through futures contracts). An operational business will have other risk factors that determine its stock price, while a commodity is a pure and simple pricing game based on supply and demand. To that end, the article details below why, for example, the TotalEnergies (TTE) share price has remained stable since the start of the year while oil prices have risen significantly.

BCX is a cyclical fund by the nature of the underlying securities comprising the portfolio, and has a low Sharpe ratio of 0.55 and a high standard deviation of 19.3 (both over a 5-year range). The fund tends to have very large declines, which averaged -50% both during the 2016 commodity decline and during the Covid selloff. On a long-term basis (10-year period), the fund shows a rolling total return of 5.9%, which is what a true buy-and-hold investor should expect from this vehicle. Unlike other CEFs, BCX only uses the minimum regulatory leverage (less than 2% leverage) and can therefore be compared to energy and mining ETFs.

BCX is a CEF with minimum leverage that is a mix of global oil and gas majors and mining conglomerates. Over the long term, we don’t think BCX has generated substantial alpha compared to plain vanilla ETFs. While there may be a little more left in the current commodity bull cycle, BCX is not yet trading at its historic discount to NAV. For a retail investor already in the name, we qualify it as Holdwhile in terms of fresh money we don’t think it’s an ideal entry point and there are better alternatives on the market.

Assets

The CEF holds large capitalization companies:

style

Portfolio style (Morningstar)

And specifically, the greatest exposure is provided by the major global oil and gas companies as well as the large mining conglomerates:

industry attribution

Industry Breakdown (Annual Report)

ten largest farms

Top Ten Stocks (Annual Report)

Three of the world’s largest oil and gas majors make up the top 3 holdings, followed by large multinational mining conglomerates.

The fund has only 47 holdings and the top 10 names represent more than 45% of the portfolio.

Owning a business that derives profit from raw materials is not the same as owning the raw material factor. The best example to illustrate this is the recent divergence between oil prices (the underlying commodity) and the TotalEnergies share price. While Brent oil and WTI went parabolic after the start date of the conflict in Ukraine, the TTE stock actually went down:

total share price relative to oil

Total stock price versus oil (seeking alpha)

The reason for this event is that Total will have to write down its stake in oil and gas projects in Russia on the back of a general avoidance of jurisdiction. There is a clear separation in performance between the underlying commodities, which are pure price play, and the large global operating companies which involve other risk factors besides commodity prices. A retail investor must clearly understand the bifurcation.

Performance

Given its composition, we will compare BCX to the Energy Select Sector ETF (XLE) and the iShares MSCI Global Metals & Mining Producers ETF (PICK). Since the beginning of the year, BCX and PICK lag XLE:

cumulative total return s

Cumulative total return since the beginning of the year (s)

The reason for this performance gap, particularly for BCX, is the large oil and gas companies in the portfolio – we see an overweight in European companies, which have lagged significantly behind their US counterparts in 2022.

On a 3-year basis, BCX and PICK outperform thanks to the strong performance of miners:

Total return over 3 years

3-year total return (seeking alpha)

In the very long term, the three vehicles show similar performance:

10 year return

Return over 10 years (In search of Alpha)

We can see how BCX is underperforming the XLE ETF through 2020, only to be helped after the Covid pandemic by its miner exposure.

Premium/Discount

The fund has historically traded at a substantial discount to net asset value:

premium/discount to NAV

Bonus/Rebate to NAV (Morningstar)

We can see how historically BCX trades at a discount to NAV between -10% and -15%. Buoyed by a historic rally by oil and gas majors and mining conglomerates, the fund has reduced its discount to the current level.

Conclusion

BCX is a CEF focused on equity securities issued by commodity or natural resource companies and has a small yield of 4.71%. With minimal leverage (less than 2%), the CEF is very similar to an actively traded ETF. On a long-term basis (10-year period), the fund has a rolling total return of 5.9%, which is what a true long investor should expect from this fund. BCX has not generated enough alpha over the long term to justify the high management fees of a CEF structure. From an entry point perspective, BCX is not yet trading at its historic discount to NAV. For a retail investor already in the name, we assign a rating Holdwhile in terms of fresh money we don’t think it’s an ideal entry point and there are better alternatives out there.

About Ellie Cohn

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