NBXG - Equity CEFs: Ride The NBXG Wave

2023-06-12 10:14:25 ET

Summary

• If we are, indeed, in a new bull market, what funds look attractive here and are poised to recover?
• Everyone knows that Artificial Intelligence is the new buzz word, and even if we are NOT in a new bull market, funds that have AI exposure should still see buyers.
• One equity CEF that had very poor timing when it came public, and thus has dropped to a -20% discount, was the Neuberger Berman Next Generation Connectivity Fund Inc, NBXG.
• For those who were in on NBXG's $20 IPO 2-years ago, they're either sitting on losses or have already taken their losses. But for those who have waited for better timing, one could argue that at a $10.47 current market price, almost a -50% haircut from the $20 IPO, NBXG is in the early stages of recovery.
• The first thing to know about NBXG is that it's not your typical mega-cap technology stock fund like STK or BST, both of which trade at premiums. In fact, NBXG was the only one of these 3 funds to own the artificial intelligence's big-stock winner so far, Nvidia, as a top holding.

The Neuberger Berman Next Generation Connectivity Fund Inc ( NBXG ) , $10.47 current market price , had an inauspicious start when it came public on May 25th, 2021 at both a $20 NAV and MKT price.

Though NBGX closed out 2021 with a $20.04 NAV (after distributions), the bear market of 2022 hit the fund hard, with NBXG closing out 2022 at a $9.10 MKT price and an $11.63 NAV.

That resulted in a -41.4% total return MKT price loss and a -36.5% NAV loss for the calendar year of 2022:

Clearly, not good news if you owned NBXG during this period. But as we know in closed-end funds, or CEFs, it's all about timing and one shareholder's disaster is another shareholder's opportunity.

So why NBXG and not another technology over-weighted fund like the Columbia Seligman Premium Technology Growth Fund ( STK ) , $30.20 current market price , or the BlackRock Science and Technology Trust ( BST ) , $34.31 current market price or the Invesco QQQ Trust ETF ( QQQ ) , $25.56 current market price ?

Well, certainly STK, BST and QQQX have been around much longer than NBXG and have better track records, but they all focus in the "safer" large-cap technology stock space, whereas NBXG is more exposed to the smaller-to-mid cap, disruptive technology space including private equity.

But it's not like STK, BST and QQQX performed that much better at NAV in 2022. In fact, NBXG was not even the worst of the four despite its smaller cap/private equity technology focus:

No, the reason why I believe NBXG offers a better opportunity at this stage of a recovery in the technology space is two-fold:

• First, NBXG is at a FAR better valuation at a -20% discount vs. a +12.1% premium for STK, a +2.6% premium for BST and a +5.6% premium for QQQX. Thus, it seems like a lot of the low-hanging fruit has already been picked in these funds.

• Second, NBXG's investment strategy has a highly correlated and symbiotic relationship with artificial intelligence. According to Neuberger & Berman, the fund focuses on companies that demonstrate significant growth potential from the development, advancement, use or sale of products, processes or services related to the 5th generation mobile network and future generations of mobile network connectivity and technology.

We've heard the 5th generation mobile network buzzword tossed around over the last few years while the goal of 5G rollouts was ultimately faster speeds, greater capacity and lower latency. At the time, it was felt that 5G would offer significant advancements in larger data downloads, like in movies or other large data sets. But clearly, this is something that artificial intelligence will be able to take advantage of too and can actually improve upon.

From this article in October of 2020, How 5G And Artificial Intelligence May Influence Each Other , there was already speculation that the two would need each other to grow and thrive:

Though at different stages of the technological hype cycle, 5G and AI can improve one another's capabilities in the enterprise. 5G increases the speed and responsiveness of wireless networks while AI can help balance loads and increase the efficiencies of an enterprise's devices. For the enterprise, the potential combination of 5G and AI is significant, but may be a few years off.

So what is NBXG? NBXG is an equity based CEF that can hold stocks of any market capitalization size. Currently the equity portfolio includes roughly 68 publicly traded stocks (top 10 shown below), representing about 80% of the fund's current $1.1 billion total portfolio value, while holding 8 private/restricted positions, which represent about 16% of the total portfolio value.

How does NBXG generate income to pay for its $0.10/share monthly distribution, equating to an 11.5% current market yield? NBXG is an option income CEF that sells individual stock options on virtually all of its stock positions.

That brings in enough premium to actually cover the fund's $7.87 million per month distribution based on the number of shares outstanding. So, during difficult market periods when the fund can't rely on appreciation to help cover the distribution, the written option strategy goes a long ways to supplement that distribution.

And that's a big reason why, even during a bear market like in 2022, NBXG's distribution was not cut. For example, Nvidia Corporation ( NVDA ) , which was shown as the #9 holding above on April 30th, had 99 contracts written against it as of April 30th. Those were worth 9,900 shares out of the 77,554 shares of NVDA held.

Now, you may be aware that NVDA recently announced a blowout quarter on May 24th and rose +24.4% the next day. In fact, NVDA is now NBXG's #3 holding due to the price share rise from $305.38 on May 24th to $379.80 on May 25th.

So even though NBXG had 99 contracts written against its position in NVDA, they will still be able to keep all of that income if they don't close out the option positions. Yes, the fund could lose all 9,900 shares of NVDA at lower strike prices, which are currently written out as far as September of this year, but that is the price you pay to write options against your positions.

And don't forget, NBXG will continue to own a substantial number of shares of NVDA no matter what. But this is how a technology focused option writing equity CEF generates its income when it can't rely on interest or dividends to help pay for its distribution.

What this also means is that, due to NBXG's realized losses last year during the bear market, the fund should be paying out 100% Return of Capital on its distributions for the foreseeable future. So for shareholders with taxable accounts, that means the current 11.5% market yield is essentially tax-deferred until you sell the fund since you are supposed to lower your cost basis in NBXG by the Return of Capital amount.

It's really a win-win to be a shareholder of NBXG right now. Not only does NBXG's portfolio fit in nicely with the market's love affair with tech and artificial intelligence, NBXG's depressed market price at a current -19.1% discount, means that the fund's NAV yield is a much lower 9.3% to have to cover.

And with NBXG's NAV up +15.7% YTD, its already covered its NAV yield so far this year. That's the 7th best performing equity CEF I follow as of June 9th, 2023. Not bad for a fund that doesn't even own the mega-cap technology stocks. Well, except for NVDA now.

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