Fund Investors: This Envelope Is Not Junk Mail
Editor’s note: Our colleague Jim Pearce is hosting a live event on Wednesday, May 27 at 4:30 PM ET — and he’s doing something most analyst services won’t: walking through every comeback stock he called for 2026, by name, with the actual return. Including the ones that haven’t worked yet. Plus three new picks for the second half of the year, one of them free for anyone on the call. Save your seat for the Halftime Report →
My mailman probably hates me. Each week, I receive stacks of trade notifications, proxy votes, quarterly statements and other communications from my brokerage accounts. Honestly, much of it goes right in the trash can. But if you’re a closed-end fund (CEF) investor, then you might occasionally receive something called a “Rights Offering”.
Open it.
I got one from BlackRock Utilities, Infrastructure & Power Trust (NYSE: BUI) a couple months ago. Other fund families like Nuveen, Gabelli and Cohen & Steers have all sent them out to fundholders recently. These notices are written in a legalese that can be difficult to understand, so I sometimes get queries from puzzled readers asking for help. In plain, layman’s terms.
Here goes.
First things first, it’s important to understand that closed-end funds are built differently from traditional mutual funds. New shares aren’t continuously offered for sale – there is a fixed number available. So they trade like a stock — you buy them from another investor, not the issuing fund company.
That’s advantageous from the manager’s perspective, since they don’t have to deal with cash inflows and redemption outflows and can manage a fixed pool of assets. The downside, of course, is that the fee-based income is also fixed. So for a successful fund to make more money, it must gather more assets… by issuing additional shares.
That is accomplished by a rights offering, through which existing shareholders are granted the right (but not the obligation) to purchase more shares. Sometimes this is done on a 3:1 basis. Sometimes 5:1. The ratio varies.
In the case of BUI, each share is granted a right. And every four rights conveys the option to purchase one new share.
The math is simple. An investor who owns 400 shares of BUI and exercises all 400 rights would purchase 100 more shares and end up with a total stake of 500 shares.
So what’s in it for you? Well, for starters, you get to buy these additional shares at a discount, often referred to as a “subscription price”. To attract interest, management typically extends something of a one-time promotional offer. Here’s where it can get a bit more complicated (bear with me).
This transaction can be either accretive or dilutive to the fund’s future net asset value (NAV) per share. That depends on whether the new shares are issued above or below current NAV.
First, we’ll look at the dilutive scenario, which happens when offerings are made below NAV. In this case, the underlying asset base will grow by a smaller percentage than the number of shares outstanding — thereby leading to a slight decrease in the net asset value per share.
I’ll give you a quick example. Suppose there are 1 million shares outstanding of a fund with $14 million in assets. The NAV would be $14.00 per share. If there is a rights offering for another 1 million shares at $13.00, the number of shares would double from 1 million to 2 million. But the $14 million portfolio would only grow by $13 million to $27 million. Afterwards, the NAV would slip to $13.50 per share ($27m/2m).
The opposite occurs whenever a fund issues shares above NAV. This is less common, but normally happens when the fund’s market price is well above its NAV and the subscription price is set somewhere in the middle.
There are other considerations. A rights offering can lower a fund’s undistributed net investment income (UNII) per share. But with funds that distribute nearly all their portfolio income, that’s a moot point.
On the positive side, rights offerings spread fixed operating costs across a larger asset base, thereby lowering expense ratios. They also allow the portfolio managers to deploy assets into attractive new opportunities without first raising cash by taking realized gains on existing holdings (and triggering taxes).
As for BUI, BlackRock saw its core investing niche benefiting from powerful structural catalysts, like “the reshoring of power supply chains stressing grids and triggering the largest utility capex cycle in decades.”
Assuming these offerings are made at or near NAV, they don’t materially impact distributions.
Let’s suppose a fund with $100 million in assets and 10 million shares outstanding ($10 NAV) is earning 6% on the securities in its portfolio. It announces a rights offering for 10 million new shares priced at $10.00 each. That offering would double the asset base from $100 million to $200 million. Assuming the new money can be put to work earning the same 6%, then portfolio income will also double from $6 million to $12 million.
The share count would grow proportionately from 10 million to 20 million. So net investment income would remain unchanged at $0.60 ($12m/20m) per share.
As you can see, the potential benefits of a rights offering depend greatly on the circumstances. But the biggest factor is the aforementioned subscription price. That’s what existing fundholders pay to purchase new shares before they hit the public market.
This price is typically determined by averaging the fund’s closing price in the days (or weeks) leading up to the event. There is usually a stated expiration date. Remember, CEFs can trade at a premium or a discount to their NAV.
BUI framed it using three possible scenarios.
1.) The subscription price will be set at 95% of the calculated average market price.
2.) Unless… the fund trades at a sufficient premium for the calculated subscription price to exceed NAV, in which case it will be set at one penny below NAV.
3.) Or… the fund trades at sufficient discount for the resulting subscription price to be less than 95% of NAV, in which case the subscription price will be set at 95% of NAV.
When I first received the notice, the fund was priced at $26.55 per share, slightly below its portfolio value NAV of $27.52 per share. That would fall under scenario three. So if nothing changed, the subscription price would be set at just $26.14 ($27.52 * 95%).
That’s like buying a $1 bill for three quarters and two dimes.
Clearly, these transferable rights have value. Prior to the offering, they traded under the symbol BUI-RT. What was their intrinsic value? Well, that’s easy enough to calculate.
Current BUI Market Price: $26.55
Subscription Price: $26.14
Rights ratio: 1/4
Value of each right: ($26.55 – $26.14) * .25 = 10.25 cents
The market isn’t always efficient, so don’t be surprised to see these rights trading above or below their intrinsic value. It’s not uncommon for fundholders to sell them quickly and pocket some newfound cash. But arbitrageurs will keep pricing in check.
So what steps should you take next? Aside from doing nothing, there are three options.
Option No. 1
Fully exercise your rights. This will increase your position by one-quarter (perhaps a bit more, if the issue is oversubscribed). Remember what drew your interest to begin with. In this case, BUI has a cherry-picked portfolio of defensive, long-lived power and infrastructure assets like American Electric Power (NYSE: AEP) and National Grid (NYSE: NGG) that are generating a healthy 6.1% payout.
Option No. 2
Sell your rights to somebody else. You might not have any idle cash to invest right now. Or, you may already have ample exposure to this particular asset class. Remember, this is a right, not an obligation. Take the free income from selling these rights and invest elsewhere as you please.
Option No. 3
Exercise your rights. But first, sell one-fourth of your position right now at the current market price. You will later buy those shares back.
This may seem pointless. But by selling a portion of your position today, you raise the cash to exercise your rights and won’t have to pay anything out-of-pocket when the time comes. Why bother? Because you are selling at full market price today and replacing the sold shares at 95% of market price tomorrow.
One caveat: this sale could trigger a capital gains tax, in which case this approach would be better suited to a tax-deferred account. Also, you can’t rule out a 5% rally in the ensuing days. Ultimately, this decision is entirely up to you.
The kind of income discipline Nathan lays out above — finding quality yield where others see junk mail — is the same contrarian instinct Jim Pearce applies to his comeback-stock process. On Wednesday, May 27 at 4:30 PM ET, Jim is going live to walk through the full 2026 scorecard on every comeback call he made this year. Winners and misses. Then three new picks for the second half — one from his Growth portfolio, one from Income, one from his Fund portfolio. The first pick, attendees keep for free, no subscription required.