BST: A Growth Fund For The Income Investors, 8.3% Yield

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BST is a closed-end fund that primarily invests in Science and Technology companies that have the potential to provide rapid and sustainable growth.Besides growth potential, currently, the fund yields...

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Other salient features of this fund are as follows:  As the fund's name suggests, the fund is managed by the BlackRock Group, one of the largest asset and fund managers. The fund seeks high growth and has a flexible mandate to invest in technology companies of all market caps, countries/regions, and industries. The fund invests globally; however, roughly 87% of its assets are invested in companies based in the US. The fund seeks to reduce volatility by writing covered-call Options on a part of the underlying portfolio, using individual stock holdings. It usually writes covered calls on 33% of the portfolio stock assets. The fund uses zero leverage. The fund has paid $23.44 a share in distributions since its inception in 2014 while growing the NAV. The NAV stood at $37.54 as of Oct. 08, 2024, which is 97% higher than the inception NAV of $19.06. This is a concentrated fund in the technology sec","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"BST":"BlackRock Science and Technology Trust"},"translate_title":"BST：面向收益投资者的成长基金，收益率8.3%","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"BST":0.9},"content_text":"BST is a closed-end fund that primarily invests in Science and Technology companies that have the potential to provide rapid and sustainable growth.Besides growth potential, currently, the fund yields an attractive 8.3%, making it a good investment for income investors.We would rate the fund as a 'hold' for existing owners and a 'buy' for new investors. However, the new buyers should use dollar-cost-averaging to avoid the risk of buying near the top.   Khanchit Khirisutchalual Introduction: BlackRock Science and Technology Trust (NYSE:BST) was incepted in October 2014 as a perpetual equity closed-end fund. It has a reasonably long history of 10 years, but not as much as some of the Eaton Vance's similar funds have. The fund's main focus is investing in technology and high-growth innovative companies. The fund has a decent but mixed record of performance during the last ten years. 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.\" Previous review: We last provided a review of this fund on Dec. 7th, 2023. We opinioned at that time that it was a good investment for retirees and income investors who do not want to deal with the S&P500 and decide when to sell shares to raise income. At the time of our last review, the price (and NAV) was much cheaper, and for that reason, the yield was much better. We were of the view that with the interest-rate cuts on the horizon, BST and similar funds should continue to do well. So, with the fund's NAV having grown nearly 13% since then, is BST still worth consideration? That's what we are going to look at in this review. Other salient features of this fund are as follows:  As the fund's name suggests, the fund is managed by the BlackRock Group, one of the largest asset and fund managers. The fund seeks high growth and has a flexible mandate to invest in technology companies of all market caps, countries/regions, and industries. The fund invests globally; however, roughly 87% of its assets are invested in companies based in the US. The fund seeks to reduce volatility by writing covered-call Options on a part of the underlying portfolio, using individual stock holdings. It usually writes covered calls on 33% of the portfolio stock assets. The fund uses zero leverage. The fund has paid $23.44 a share in distributions since its inception in 2014 while growing the NAV. The NAV stood at $37.54 as of Oct. 08, 2024, which is 97% higher than the inception NAV of $19.06. This is a concentrated fund in the technology sector that has a weightage of nearly 78%. As of Sep. 30, 2024, the fund was invested in only 95 securities, whereas the top 10 holdings constituted nearly 50% of the assets. As of Oct. 08, 2024, the fund had roughly $1.3 billion worth of assets under its management. The fund is an actively managed fund and has an expense ratio of 1.09%, which includes the advisor fee of 1.00%. There is no leverage, and as such, there is no interest expense. As of Oct. 08, 2024, its distribution yield on the market price was 8.28% and 8.00% on the NAV. As of Oct. 08, 2024, BST's market price offered a discount of -3.45% to its NAV, which is slightly better than its long-term averages. The fund's 3-year and 5-year averages are -1.44% and –0.24% respectively. The fund has only about 10 years of historical performance. During the last 10 years, we have had a couple of crashes or periods of economic uncertainties, including the 2020 pandemic. However, the fund has performed reasonably well in its category. As of Jun. 30, 2024, since inception in Oct. 2014, the fund has returned an impressive 15.59%, annualized, on an NAV basis, compared to 12.76% for the S&P500. These results assume that all distributions were reinvested.  Who should invest in BST?  Income (from investments) is very important to 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. While income is important, you do not want to miss out on growth. Then this fund is for you.  Financial Outlook: Let's look at the Fund's Financial health and performance. The most recent semi-annual report that the fund has released is for the period from Jan. 2024 to Jun. 30, 2024. The fund's NAV has been moving in the right direction during 2024 and has gained nearly 15% YTD. Net Investment Income: The net investment income (or NII in short) is the net income that a fund earns from its investment in the form of dividends, distributions, interests, and any other generated income (for example, buy-write options) minus all of the fund's expenses, including management fees, operating expenses, commissions, and interest on leverage, if any. For equity-based funds, especially in high-growth sectors like technology, the NII is not very relevant compared to fixed-income funds. 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 ending Jun. 30, 2024, and the 12-month prior period ending Dec. 31, 2023; negative amounts are shown inside parentheses). Table-1: Author (Data: Fund's Annual report) The NAV of the fund stood at $38.89 at the end of Jun. 30, 2024. The NAV, as of Oct. 09, was at $38.33, which is almost flat since the June report. The year 2022 was universally bad for stocks, especially technology and growth stocks. BST suffered a massive decline in NAV in 2022 from the highs of 2021. However, the NAV for the fund has since recovered roughly by 19% during the year 2023 and another 12% in the first half of 2024. 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 annual income (on a monthly basis), which is roughly 75% of the fund's distributions. You could reinvest the balance 25% back into the fund to allow it to grow and prosper. BST provides a monthly (managed) distribution of $0.25 per share, which comes out to be a yield of 8.39% at current prices (as of Oct. 07, 2024). It has gradually increased the monthly distribution amount over the years from $0.10 to $0.25 per share ($3.00 a year), but the last increase was in late 2021. The fund has also provided special distribution in some good years, but it is not very frequent. Since inception until the end of Sep. 2024, BST has paid a total distribution of $23.44. The NAV at inception was $19.06, and as of Oct. 08, 2024, it is $37.54, nearly a 97% increase. These are pretty impressive results, but we have to keep in mind that the technology sector has done very well during the last 10 years. So, is the distribution covered? This fund is mostly an equity fund, and that too is mostly in technology stocks. Technology and hi-tech companies are not known for paying dividends, let alone paying high dividends. That said, the fund generates some income by writing option calls. But that is not sufficient to pay for distribution in any significant way. Most of the investment income is consumed by the fund's expenses. Distributions are mostly paid from capital gains and, sometimes, by way of ROC (return of capital). But that should not discourage you, as ROC is not very relevant for a fund like BST. What matters is the stable and growing NAV. The kind of underlying holdings that the fund is invested in can generate plenty of capital gains in a good year. However, when the broader market is performing poorly, such as in 2022, the fund generates capital losses, and it may have to rely on ROC (return of capital). However, if we look at the stock market history, the number of good years vastly beat the number of bad years. Discount/Premium: The fund is currently trading at a discount of -4.73% (to its NAV). But if you look at its 3-year history, it has traded at a smaller discount of -1.47% (average). It regularly switches from premium to discount and vice versa. The only time the fund has seen bigger discounts was from 2015-2017. However, the NAV has gained quite a bit in 2023 and 2024 to the extent of 32%, in addition to paying distributions. Even then, it has lagged behind some other funds of similar nature. That may explain the slightly larger discounts. Obviously, these gains have been on the back of the recovery in the technology sector as well as the broader market. Chart-1: Premium/Discount information CEFConnect.com Funds Holdings: The fund is quite concentrated in the technology sector; however, within the sector, it is diversified into 95 positions. Even then, the top 10 positions make up nearly 50% of the assets. Some of its largest holdings are NVIDIA Corp. (NVDA), Microsoft (MSFT), Apple (AAPL), Broadcom (AVGO), Meta (META), Cadence Design Systems (CDNS), Amazon (AMZN), Oracle (ORCL), and ASML Holdings N.V. (ASML). Table-2: Top 10 Holdings (As of Sep. 30, 2024) Courtesy: Fund's website Chart-2: Sector Allocations (as of Jun. 30, 2024)   Fund's fact sheet Performance: Here is the performance of the fund BST as presented on the fund's website. Table-3: Source: Fund's Fact sheet Let's compare the performance of BST with the S&P500 and also with another similar fund, Eaton Vance Enhanced Equity Income Fund II (EOS), that we covered last week here. Table-3A: (As of Sep. 30, 2024)     BST (NAV) EOS (NAV) S&P500    Since Inception (Nov. 2014 – Sep. 2024) (close to 10 years_  12.38% 15.09% 13.07%   Max. Drawdown (Nov. 2014 – Sep. 2024) -42.58% -30.34% -23.95%   5-YR performance 13.34% 14.96% 15.82%   3-YR performance -2.80% 8.69% 11.75%   1-YR performance 29.86% 37.26% 36.16%   YTD 2024 Performance (until Oct.08) 14.96% 22.59% 21.74%   Click to enlarge So, what is the proper benchmark for this fund? It is a bit complicated. The fund has 80% of the assets in large-cap stocks, with 19% in small-cap. It also underwrites nearly 33% of the portfolio value using call-options. Also, these allocations can change to some extent from time to time. So, to make a proper benchmark, we need to use at least two or three index funds. To keep things a bit simple, we will use two index funds: a high-growth fund and a call-options index fund.  Vanguard Growth Index Fund (VIGAX) Cboe S&P 500 BuyWrite Index  Since BST writes covered calls on roughly 33% of its portfolio; ideally, a benchmark should allocate 33% to the Cboe S&P500 BuyWrite Index and the rest to the growth fund. The equivalent ETFs for these two indices are:  Vanguard Growth Index Fund (VIGAX) – 67% Invesco S&P 500 BuyWrite ETF (PBP) -- 33%  Let's compare the performance of the BST fund with our newly created benchmark. In the table below, we can see that during most time periods, BST has performed better for the longer term but has underperformed in the last 3 years. Table-3B: (as of Sep. 30, 2024)   Performance (Total)  YTD 2024 (Oct 08)  1-YR 3-YR 5-YR 10-YR  Since Jan. 2015    BST (NAV) 14.96% 29.86% -2.80% 13.34% 15.09% 15.23%   BST (Market-price) 14.60% 28.38% -3.38% 11.35% 14.08% 15.79%    A Mix of Two benchmarks (67%:33% each, VIGAX, PBP)  20.73% 33.75% 9.53% 15.32% 12.55% 12.59%   S&P500 21.74% 36.16% 11.75% 15.82% 13.07% 13.03%   Click to enlarge Now, the performance of our hypothetical/hybrid benchmark looks quite good as well, but we have to remember that it is not for income investors, as they provide very little income. Also, the performance of the S&P500 has been simply excellent during the last 10 years, but it has not always been like that. Moreover, the S&P500 pays less than a 1.3% dividend yield. So, the S&P500 does not suit income investors very well as you have to sell shares to raise the income, and that's where it gets very tricky. So, all in all, BST is an appealing investment for income investors who also desire high growth. All that said, if someone is purely looking for growth and high returns, with no consideration for income, they don't require this fund. Risk Factors: Investors need to be aware of certain risk factors that are associated with this fund and CEFs in general. Risk factors could be summarized as follows:  Interest rate risk: The technology sector is sensitive to interest rates. Currently, the market expects a continued decline in interest rates in 2024 and 2025. If the pace of interest rate cuts by the Fed is somehow slower than expected or paused due to any spike in inflation, we may see a decline in the asset values of the underlying holdings of this fund. However, this fund uses zero leverage, so it is not impacted by the interest burden as such. Concentration risk: As stated earlier, the fund has an outsized exposure to the technology sector, almost to the extent of 75%. We know the valuations in the tech sectors, especially for the semiconductor companies, are rich, especially due to the high expectations from the AI phenomenon. Any reversal in the fortune of this sector can adversely impact this fund. Risk of discount versus premium: The fund is trading at a relatively small discount, but it has been widening in the last year. If the discount keeps widening, the fund will lose market value in spite of maintaining a stable NAV. The general risks, such as the geopolitical situation. There is still some possibility of a recession during the first half of 2025. If that were to happen, it would negatively impact most asset classes, and the NAV of this fund would decline. That said, even if a recession occurs, most market participants expect it to be a shallow one. High drawdown risk: This fund is concentrated heavily in the technology sector and its sub-sectors. The sector is prone to high risk and high gain. The drawdowns in the sector can be significant in an adverse environment. From the past record, the drawdown of this fund during the tech burst of 2022 has been much worse than the S&P500. If the investor is withdrawing the income, the drawdown may even appear more. Investors who cannot tolerate high drawdowns should avoid this fund.  Concluding Thoughts: If you are a total return investor, this is not the fund for you. However, if you are an income investor, a retiree, or a near-term retiree, and you need your capital to start earning you at least a 6% income yield while providing you with long-term growth, then this fund is a worthy candidate for your income portfolio. The past record shows that, at least in the longer term, in many of the time frames, it has sometimes exceeded the performance of the S&P500. However, more recently, during the last 3 years, it has lagged the S&P500 by a significant margin. Also, as presented above, similar funds from the Eaton Vance family, such as Eaton Vance Enhanced Equity Inc Fund II or Eaton Vance Enhanced Equity Income (EOI), have actually performed better and more consistently than BST. So, if you are buying just one such fund, then EOS or EOI may be a better choice. Alternatively, one can acquire both the EOS (or EOI) and BST for better diversification and more balanced results over time. The fund pays a high level of monthly income, with an annual yield of 8.3%. However, we recommend withdrawing no more than 5% to 6% and reinvesting the balance back into the fund for the original investment to prosper. Please keep in mind that this fund can have serious drawdowns during difficult periods.  We rate BST as a 'hold' for the existing owners. However, if you are a new buyer, you should plan to buy it in multiple lots, as the fund has already gained so much in the last year or so. Buying in multiple lots will give you the benefit of dollar-cost-averaging. We think that with interest rates declining from here, BST should continue to perform reasonably well into 2025.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2475841121"}