Dallas Federal Reserve president Robert Kaplan has recently been under fire for personal investment activity he reported for calendar year 2020 (a year when central bank actions largely propped up the financial markets during the COVID-19 pandemic). The news was first reported by The Wall Street Journal earlier this month, and more recently Kaplan announced that he will sell all his stocks by the end of September, as well as avoid individual equity investments altogether for the rest of his term.
Most notably (in our opinion), Kaplan disclosed ownership of two closed-end funds on this disclosure form that was filed with the Dallas Fed. The two closed-end funds that Kaplan owned during 2020 include BlackRock Floating Rate Income Trust (BGT) and BlackRock Floating Rate Income Strategies Fund (FRA). These are both closed-end funds that primarily invest into floating rate instruments.
Why are these investments notable?
While we will not speculate on Kaplan’s reasons for investing in BGT and FRA, here is some basic analysis given what we know:
- We believe BGT and FRA were trading at attractive discounts relative to their historical average discounts during 2020.
- Both funds pay out regular, periodic cash distributions.
- Both funds provide access to floating rate loans, which could potentially perform well even if interest rates rise, since their coupons typically reset contractually based on interest rates.
- BGT and FRA are managed by a team at BlackRock who we believe has a good long-term track record.
Our Take
While we do not want to comment on the ethics issue that Kaplan is being scrutinized for, we think his investments in BGT and FRA were smart, timely, and spot-on. We have no way to confirm whether Kaplan still holds these funds, but we’re impressed that he turned to the closed-end fund market to get exposure to floating rate instruments. If you are an investor whose looking for exposure to closed-end funds, you might consider an investment in the Matisse Discounted Bond CEF Strategy (MDFIX) or the Matisse Discounted Closed-End Fund Strategy (MDCEX).
Disclosure Form Analysis
By combing through Kaplan’s disclosure form closely, we can see that:
- Kaplan’s position in BGT exceeded $1 million in market value as of December 31st, 2020.
- Kaplan’s position in FRA exceeded $1 million in market value as of December 31st, 2020.
- Kaplan received more than $500,000 in dividend income from BGT during calendar year 2020.
- Kaplan received more than $500,000 in dividend income from FRA during calendar year 2020.
- Kaplan did not trade BGT or FRA during calendar year 2020.
Based on the amount of dividend income he received from both funds during 2020, we believe that it’s reasonable to assume that he owned at least $8 million of each fund at year-end. We also think it’s reasonable to assume that Kaplan’s total net worth is likely over $100 million, given that he reported position sizes of over $1 million for 27 of the 33 reported securities, as well as dividend income in excess of $500,000 for 7 different positions during calendar year 2020.
Want to learn more about closed-end funds? We’ve included this resource on our website, which contains detailed information about these unique investment vehicles.
As of June 30, 2021, MDCEX and MDFIX did not hold positions in BlackRock Floating Rate Income Trust (BGT) and BlackRock Floating Rate Income Strategies Fund (FRA).
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