2023-12-10 09:00:00 ET
Summary
- BlackRock Science and Technology Trust is a closed-end fund that primarily invests in science and technology companies, offering high income and growth potential.
- For nine years of its existence, it has offered nearly 14% of annualized total returns and is currently paying just under 9% in distribution income.
- We would rate the current price as neutral; however, we believe time is appropriate to initiate a position if you do not have one.
BlackRock Science and Technology Trust ( BST ) was incepted in October 2014 as a perpetual equity closed-end fund , or CEF. As per the fund's literature:
"its investment objectives are to provide income and total return through a combination of current income, current gains, and long-term capital appreciation. Also, the fund will invest at least 80% of its total assets in equity securities issued by U.S. and non-U.S. science and technology companies that are likely to provide rapid and sustainable growth potential. As part of its investment strategy, the fund will also employ a strategy of writing (selling) covered call options on a portion of the common stocks in its portfolio. "
Other salient features of this fund are as follows:
- Seeks high growth: The fund has a flexible mandate to invest in technology companies of all market caps, countries/regions, and industries.
- Diversified global exposure: The fund invests globally; however, roughly 80% of its assets are invested in companies based in the US.
- Aims to reduce volatility: The fund seeks to reduce volatility by writing covered-call Options on a part of the underlying portfolio. Currently, it has written covered calls on 33% of the portfolio stock assets.
- The fund uses zero leverage and currently manages over $1.15 Billion worth of assets. As of Oct 31, 2023, it had 294 individual positions (including individual stocks, call options, preferred securities, etc.); however, the top 10 holdings represent nearly 40% of the total assets.
- The fund is an actively managed fund and has an expense ratio of 1.11%.
- As of Dec. 06, 2023, its distribution yield is 8.91%.
- As of Dec. 06, 2023, the discount/premium to NAV is +0.78%, and basically in the same range as the 52-week average discount/premium of +0.76%.
Why the fund may be a better investment than Technology Index funds?
So, why invest in a fund like BST with its high fees of 1.11%, while you can buy technology index funds at much lower fees? There is a one-word answer. That is INCOME. But it is subjective.
Who should invest in BST or any other similar fund?
- Income (from investment) is very important for you and is either needed right now or will be needed in the next few years.
- Do not like the idea of selling shares (of an investment) to raise income, as it causes too much uncertainty and emotional stress.
- If the income is important to you, but you do not want to miss out on growth, then this fund is for you.
Who should NOT invest in BST and instead invest in Technology Index funds (ex., Invesco QQQ Trust ETF ( QQQ ))?
- You are relatively young and have many years of compounding ahead.
- You absolutely would NOT need income for at least a decade or more.
- You are mentally tuned to the frequent ups and downs of the stock market and can handle the emotional stress that goes with that.
Financial Outlook:
Let's look at the Fund's Financial health and performance. The most recent semi-annual report that is available to investors is for the period of Jan – Jun 2023.
- Net Investment Income:
The fund is heavily invested in technology companies, which are NOT known for their high dividend. Many of them do not even pay dividends. So, a fund like BST has very little investment income coming their way from dividends. However, the fund writes Option calls on a part of their portfolio. The extent to which they write covered calls can vary depending on market conditions, but as stated earlier, currently, it has call options written on roughly 33% of the underlying assets. So, it produces some of the income but not enough to count on to pay distributions. In fact, the NII (Net Investment income) is mostly consumed by the fund's expenses and some more.
Here is what it looks like in terms of NII, Distributions, and Net Assets at the beginning and end of the statement period.
(all amounts are in US $ (except Shares Outstanding) for the 6-month period; negative amounts are shown inside parentheses, per the semi-annual report, six months ending 30 th June 2023).
Table-1:
Item Description | $ Amount |
Total Investment Income | 2,227,265 |
Total Expenses | 5,753,782 |
Net Investment Income | (3,526,517) |
Realized Gain/loss | (19,837,391) |
Un-Realized Gain/Loss | 241,399,707 |
Net increase/decrease in net assets from Operations | 218,035,799 |
Distribution to Shareholders | (50,340,460) |
Other factors causing increase/decrease | 32,522,232 |
Net increase/decrease in net assets from Operations | 200,217,571 |
Net Assets - beginning of the period | 960,703,201 |
Net Assets - end of the period | 1,160,920,772 |
Shares Outstanding (no of shares) | 34,003,298 |
As we know, the technology sector has done pretty well in 2023 after a disastrous 2022; this has definitely helped BST as well. As we can see in the above table, the fund earned a very decent amount of unrealized appreciation. The net assets increased over 20% in the first half of 2023 after accounting for all expenses and distributions.
Also, it should be noted that the fund has 16% of its assets invested in preferred securities and 8% in private equity. Both of these investments are underwater in the current macro environment.
Distributions:
The fund probably offers the best of both worlds: growth and high income. Sure, if you do not need income today, there may be many other good options to invest in the technology sector. But if you need income, you could withdraw something like 5-6% of income every month (nearly 75% of the yield) and still do very well in terms of capital growth.
BST provides a monthly (managed) distribution of $0.25 per share, which comes out to be a yield of 8.91% at current prices (as of 12/06/23). It has increased the monthly distribution amount over the years from $0.10 to $0.25 per share ($3.00 a year). It has also provided special distribution in some good years, but it is not very frequent. Since inception until the end of Nov. 2023, BST has paid a total distribution of $20.94. The NAV at inception was $19.06, and as of Dec. 06, 2023, it is $33.40. It is not a bad outcome for income investors.
So, how is the distribution covered? Since it is mostly an equity fund and uses no leverage, it does not cover distributions by way of investment income. Distributions are mostly paid from capital gains or appreciation and, at times, by way of return of capital. It does write some call options on the part of the portfolio (usually 30%), but it is still not sufficient. You can see in the table provided above that all of the investment income is consumed by expenses. Since it is a technology fund, it is heavily invested in stocks that are likely to provide high growth and capital appreciation, usually faster than what it pays in distribution.
Discount/Premium:
The fund is currently offering no discount (to its NAV) and is trading at a very small premium of under 1%. But if you look at its 5-year history, it has rarely traded with any significant discounts. So, in a way, the fund is not cheap, but due to the types of holdings it has, it is likely to provide decent to good growth. It is still trading at nearly 40% below its peak in 2021. As long as the Fed does not increase the interest rates significantly in 2024, the technology sector is likely to keep growing. However, it may take time for the significant gains to come from the current levels. But if we wait to invest until the Fed has started cutting rates, we will not be able to buy this fund at current valuations.
Chart-1:
Courtesy: CEFConnect.com.
Funds Holdings:
The fund is pretty diversified and currently holds 294 positions (including individual stocks, call options, preferred securities, etc.). Its top 10 public holdings are ( MSFT ), (AAPL), ( NVDA ), ( CDNS ), ( MA ), ( AVGO ), ( META ), ( AMGN ), ( ASML ), and ( GOOG , GOOGL ). The top 10% of holdings account for nearly 40% of the assets. Also, it invested nearly 18% in preferred securities.
Table-2:
Seeking Alpha
Courtesy: Seeking Alpha.
Risk Factors:
Investors need to be aware of certain risk factors that are associated with this fund. Besides the investment in public companies, the fund has two other types of investments. Roughly 16% of its assets are invested in preferred securities and 8% in private equity. Both of these investments are underwater in the current environment and have resulted in unrealized losses. We know the preferred securities, in general, have performed poorly in the high-interest environment, and that applies to BST's 16% exposure as well. The same goes for the valuations of private equity.
However, there is some glimmer of hope now that we are already at peak interest rates, and there is some possibility of seeing a rate cut in 2024. That said, there are no guarantees, especially when the Fed is still talking hawkish. More so, the fate of the technology sector is also impacted by the rise or fall in interest rates. So, the near to mid-term future performance of BST is somewhat tied to the movement of interest rates.
Risk factors could be summarized as follows:
-
- The macroeconomic conditions and the movement of interest rates in 2024.
- The geo-political situation.
- Fallout (if any) on the technology sector, especially in the semiconductor segment, from the tense relationship between the U.S. and China.
- The occurrence of a recession in 2024, if so, how deep (or shallow) will it be?
- Relatively high fees of 1.11% on a zero-leverage fund. All things equal, these fees take a cut from the growth of the fund.
Concluding Thoughts:
Should you invest in the BST fund? BlackRock Science and Technology Trust, at the end of the day, is an income vehicle. We think you need to answer this question first. Are you an income investor or a total return investor? If you are in the second category and you do not need or care about income, then certainly there are better options than BST. You could be even better served by QQQ instead of investing in an income vehicle like BST.
However, if you are an income investor, a retiree who depends on regular and reliable income month after month, or approaching retirement, where you will start needing income from your investments and like to transition from the accumulation to withdrawal phase, then BST is definitely a great investment. It offers the best of both worlds: reliable and steady monthly income and decent growth of capital that will beat inflation and help you maintain your living standards.
Time and again, we have seen that it is very difficult for an average investor to emotionally deal with selling their shares to generate income. Very few people can do this effectively; most can't. You always seem to be grappling with issues like when to sell, how much to sell, and other what-if scenarios. If you do not want to deal with such issues, you need to invest in income vehicles. BST can be one of them.
Since its inception in 2014, the fund has paid $20.94 in distributions, which represents more than 100% of the original investment (inception price $20 a share).
Is it the right time to buy BST? BST was trading at a much better valuation a few months back, but that time has gone by, and we may not see it touch $28 a share any time soon. Valuation-wise, we would say the current market price is neutral, as it is offering no discount (in fact, a very slight premium). We think that in spite of a high possibility of a recession in 2024, the technology sector is going to continue doing well in 2024. Until now, the economy has dealt with high interest rates remarkably well, and recession is likely to be a shallow one if it comes. Also, the interest rates are going to stay high but flat in 2024, and if we are lucky, we may see the first interest rate cut.
All this bodes well for the technology sector. Since BlackRock Science and Technology Trust is heavily invested in the Tech sector, it bodes well for it as well.
For further details see:
BST: High Income And Decent Growth, Can We Ask More?