Summary
BST is a closed end fund managed by BlackRock that invests primarily in science and technology companies.
Recent market routs have caused steep losses as both share price and net asset value remain well off of all-time highs.
The fund includes a variety of investments in private companies which creates unique risks for shareholders.
Today, we discuss how the fund’s structure as a CEF protects its investments.
zorazhuang/E+ via Getty Images The BlackRock Science and Technology Trust (NYSE: BST ) is a closed end fund which has performed well over its history. With over $1 billion under management, BST has outperformed the market since its debut in 2014. Recent market turmoil has spoiled the fun, generating steep losses as shareholders continue to flee emerging risks. Today, we dive back into the fund and focus on one unique area of BST’s portfolio. Data by YCharts Overview and Recap
BST is a closed end fund which utilizes a portfolio of common stock and derivatives to drive total return. At a high level, the strategy is not unique and BlackRock ( BLK ) offers other successful strategies which look similar. The fund has performed well since inception, but recent market action has dramatically impacted near term performance.
BST offers an interesting value proposition to income investors. The fund invests in the most successful science and technology companies, many of which do not distribute impressive dividends. BST employs derivatives and harvests capital gains to pay shareholders a consistent, strong dividend. Based on current share prices, BST offers a 6.88% yield paid monthly in the form of a $0.25 dividend. The fund has delivered on its mission thus far, as income and share prices continue to grow. Data by YCharts As near-term risks such as geopolitical turmoil and rising interest rates continue to ravage the market, BST has felt the pain. NAV and share price have dropped accordingly as investors’ optimism tempers. Currently sitting approximately 25% off of all time highs, shareholders have been left wondering where the incredible, consistent performance of the past five years has gone. While the sails no longer benefit from the strong tailwinds of the pandemic and low borrowing costs, the course of the ship remains strong.
As we mentioned, BST invests in some of the largest and most successful companies on the planet. The portfolio is dominated by classic FAANG companies. These companies account for a significant portion of the portfolio with Apple ( AAPL ) and Microsoft ( MSFT ) representing over 10% of the portfolio on a combined basis. BLK While tech continuously runs in and out of favor as optimism peaks and withdraws, the reality is that large cap tech are some of the strongest companies on the planet. Their fortress balance sheets are well capitalized and their global reach and market dominance is nearly unparalleled in any other industry. All in all, this portion of the portfolio offers stability, despite volatility. Investors with ample time horizon and stomach for volatility should continue to benefit from the growth of the world’s largest companies.
The fund is overwritten with options contracts to help generate yield. Technology is notorious for offering minimal shareholder yield as capital is generally better reinvested. Our top two holdings generate paltry yields which are honestly hardly worth mentioning as a portion of total return. Data by YCharts Luckily for shareholders, BST’s use of covered call options helps generate income necessary to meet the fund’s distribution. Covered calls involve selling options contracts over positions in the portfolio collecting the premium as excess return. These premiums are sent to shareholders as a component of the monthly dividend. The strategy supports the overall portfolio yield at the expense of capped upside, should a position appreciate significantly.
All in all, the portfolio is well constructed and managed. BlackRock is a capable manager who have proven their capabilities as the world’s largest asset manager. Let’s dive into a more interesting area of the fund. Private Investments
As we mentioned, BST invests in private ventures as well as public equities. Referring back to the top ten holdings, readers will note there are three private investments, “Project Kafka”, “Project Shopping”, and “Project Debussy.” Other authors on Seeking Alpha have done an impressive job of uncovering information about their details. We would recommend reading their work for further information as we will not go into detail here. While they remain opaque, most are, as expected, science and technology ventures.
Many of these investments are likely in the early stages of their corporate […]
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