It’s pretty rare to find an investment that offers both higher growth and a higher dividend
than the total market, but that’s exactly what you get with BST - the Blackrock Science
and Technology Trust.
It currently offers a monthly dividend totaling more than 5% annually, and has delivered 25%
annualized returns since its inception.
Obviously this sounds pretty phenomenal, so in this video, we’re taking a closer look
at BST to see how this is possible, and ultimately, whether it deserves a spot in your portfolio.
As usual, we’ll start with exploring the fund’s investment strategy to understand
how things work behind the scenes.
This will lead us into a look at their current portfolio so we can see how it comes together
in practice.
However, most of the analysis will be focused on the fund’s growth strategy and active
management, since this is where most of the returns come from.
We’ll take a look at documents like their annual reports to figure out whether BST can
continue to produce the returns that it's delivered so far.
Then, we’ll examine the monthly dividend to assess whether there are any red flags
or things to look out for.
I’ll wrap up with my thoughts on BST and how it stacks up against similar funds.
Lastly, I’ll briefly touch on the sister fund BSTZ, which is a similar investment that
might be worth a look if you like what you see in BST.
So, let’s get started.
Before we go any further, I want to quickly highlight that BST is a closed-end fund, which
is different from standard ETFs and other investment funds.
I did a whole breakdown on closed-end funds and how to navigate them, but I’ll quickly
summarize what you need to know.
For starters, unlike index funds which continually issue new shares as investors provide more
capital, closed end funds have a finite number of shares on the market.
You can buy their shares just like you would any other stock, but supply and demand has
a much larger impact on the price of these shares because they cannot be redeemed with
the fund provider.
This means shares often trade at notably higher or lower prices than the value of its portfolio.
This is known as trading at a discount or a premium.
Second, closed end funds commonly use leverage within their portfolios, or borrowed money,
just like the individual investor might use margin.
This is important to be aware of because investors will usually end up paying extra fees to cover
the costs of borrowing, and it can make the investment more volatile.
Currently, BST uses no leverage, so this isn’t something we need to watch out for here.
Finally, closed end funds have access to more investments than just common stocks.
They can invest in less liquid assets, including things like private companies, because they
don’t have to worry about liquidating holdings to satisfy shareholder redemptions.
This can give investors like us beneficial access to these asset classes, but it can
also be dangerous because less liquidity could result in portfolio volatility, and these
holdings may not be reported as clearly as standard stock investments.
So with that in mind, let’s take a look at the strategy behind BlackRock’s closed
end fund.
The fund’s objective is income and total returns.
As the name suggests, they do this primarily by investing in a globally diversified portfolio
of science and technology businesses.
These companies will generally be selected for their rapid growth, which will deliver
returns through stock price appreciation, or for their dividend yield, which will generate
the income sought by the fund.
Of course, it’s rare that growth-focused tech businesses offer substantial dividends.
So, the fund also incorporates a covered call strategy to generate additional income.
If you haven’t heard of covered calls before, be sure to check out some of my previous videos
where I covered this strategy.
Covered calls are used by a lot of investment funds, because they can reliably be used to
generate cash flow for investors.
There is a trade off of growth in most cases, but BST maintains exposure to growth in its
portfolio by only writing covered calls on a portion of the portfolio.
This is much like the DIVO ETF I reviewed, where they’ll strategically use covered
calls on individual stocks to fulfill the fund’s objective of income without completely
sacrificing growth.
To completely simplify this strategy, BST is a growth-focused tech fund that uses covered
calls to boost income.
The technology narrative is really common these days, and could be compared to funds
like the Vanguard Information Technology ETF, ticker VGT, Ark Invest’s flagship innovation
ETF, ARKK, or even the NASDAQ 100.
We’ll dig into these comparisons more later, but it’s important to understand that the
biggest distinction BST has here is that it also uses a covered call strategy and has
a closed end fund structure.
When it comes to the portfolio, we’re not going to see anything too surprising here.
At the time of writing, BST has a total of 128 different holdings.
We can skim through them on their latest quarterly report, but there’s nothing out of the ordinary
here.
There are a lot of household names, from Apple and PayPal to Adobe and Snapchat.
This more recent list of their top 10 holdings shows that they’re also pretty balanced,
with the top 10 only making up about 22% of the portfolio.
Moving on, they seem well diversified internationally.
About 60% of the fund is made up of US stocks, which is almost spot on for what is suggested
by a market cap weighted international diversification.
They’re mostly invested into large caps, but they also have a significant allocation
to small cap stocks, which could be where they’ve identified some high-growth opportunities.
Finally, the sector breakdown shows where in tech they are allocating their investments.
Clearly, most of the focus is on software, with a noteworthy weighting to semiconductors
and related equipment.
Of this stock portfolio, approximately 28% of the portfolio has been overwritten with
covered calls.
Another look at their quarterly report verifies this - they’ve written three pages of covered
calls!
This definitely explains why they’ve been able to generate such a sizable monthly dividend.
Of course, we know the fund is still growing too, so they appear to have found a good balance
here.
Again, I’m not seeing anything alarming or unusual here.
This seems like a pretty reasonable approach to a technology growth fund, and the covered
calls are a nice way to lower the volatility and provide supplemental income.
At this point, my question is how effective is their management?
As an actively managed product, the returns of BST are dependent on the fund managers
making the right decisions with the portfolio.
This isn’t an issue with indexes like the Nasdaq or Vanguard Information Technology
ETF.
And with something like Ark Invest, they’re pretty vocal about the beliefs and research
that drive their investment decisions.
In this case, we don’t have quite as much context into BST’s decision-making, so we’ll
have to dig into their reports to find some more commentary on their strategies.
With each quarterly report, the fund managers provide discussion on the fund’s performance.
So let’s take a look at what they had to say in June 2021.
They say that the stocks they selected within the internet sector drove most of the fund’s
performance, and highlighted a few individual stocks that did well.
They also say they did poorly in the software sector, citing C3 AI for underperformance
as well as too low of a weight in Microsoft.
Finally, they mention that their covered call strategy had a positive effect on returns.
I enjoy this portion of their reports because this is how they’re sharing what went right,
what went wrong, and how they’re going to pivot in the future.
Since their strategy otherwise is just “growth oriented tech”, this is one of the few indications
we get as to how they really manage the portfolio day to day.
During the last quarter, they reveal that they’ve increased exposure to semiconductors.
We might interpret that this is due to the recent chip shortage or some sources saying
that semiconductors are the new oil.
BST is positioning the portfolio to benefit from these and related trends.
Similarly, they’ve reduced their exposure to software - which may be because of the
recent underperformance or market trends that are indicating there are better opportunities
elsewhere.
Additionally, they’ve reduced their exposure to Asia.
This is a common trend in investing right now, as that region has been facing a resurgence
in COVID cases, inflation fears and regulatory risks.
Finally, they describe the state of the fund at quarter end, mentioning their largest exposures
and their decision to underweight hardware.
We also get an indication of their covered call strategy, where they average about 6%
out of the money and 48 days until expiration.
Overall, this commentary shows me that BST is actively monitoring the market environment
and adjusting the portfolio accordingly.
None of these are really contrarian strategies, but they do fit into the fund's description
of pursuing growth opportunities in tech while following cyclical trends.
So in my opinion, it seems like a pretty straightforward approach for the technology sector.
The issue is that we just don’t get as much information as we do from firms like Ark Invest,
or any cut and dry indexing like we do from Nasdaq or Vanguard funds.
I won’t tell you whether or not to trust this management style, because I think that’s
up for you to decide.
If you agree with the strategies and discussion outlined in their reports, or if you’re
okay with the risk of simply trusting the management team, then maybe you’re happy
with holding this fund in your portfolio.
But if you want more transparency or explanation behind where your dollars are being allocated,
you might not be able to find that with this particular fund.
Last but not least, let’s take a closer look at the dividends from BST, which are
an important consideration for anyone who wants to get the monthly cash flow that this
fund provides.
As a fund that pays managed distributions, the fund will choose how they source the funds
for the dividend each month.
This is common for closed end funds that focus on growth strategies, because they anticipate
price appreciation to be a source of income for the fund.
A managed distribution allows them to take a little bit of that capital appreciation
and distribute it monthly, instead of paying a single distribution of capital gains annually,
which is common in income-focused funds.
As a result, investors can enjoy more regular dividend income.
And this is made clear by their dividend history.
They’ve paid a consistent and growing dividend since inception.
However, the important thing to look into here is the makeup of those dividends, specifically
for tax purposes.
Luckily, it looks like their distributions are almost always taxed as long-term gains,
which is the most beneficial tax treatment for investors.
There are a few instances of return of capital here, but considering the fund’s NAV has
been growing pretty substantially since inception, I don’t see this as a red flag.
More on why that is in my video on return of capital.
Plus, as we know, they are able to generate consistent income with their covered call
strategy, and I personally don’t see there being much threat to the distributions with
the way they’re incorporating that into the portfolio.
In summary, here are my thoughts on BST.
I find it to be a fairly standard actively managed portfolio of growth-oriented tech
stocks.
After reviewing the literature, the active management isn’t a huge turn off for me,
but I want to see it consistently outperform other strategies before initiating a position
here.
When you compare it to indexed strategies like Vanguard’s information technology etf
or the Nasdaq 100, there’s no clear advantage.
BST does track the performance well, but has slightly underperformed.
When you add Ark’s flagship fund into the mix, the active management of BST looks like
it misses the mark even more.
So to me, the only standout quality of BST is their covered call strategy, which should
theoretically provide consistent returns through dividend income even when the equity strategy
fails to provide returns through growth.
That means BST may be a better option in times of uncertainty or lack of growth, or for any
investor who wants that dividend income in addition to growth exposure.
I personally have some biases towards pure growth strategies, so I’m not interested
in the small dividend income if I could achieve higher total returns through growth with these
other funds.
Also, I just want to vocalize that the massive growth in tech in the last year and a half
could just be a brief trend in the market, and there’s no way to know for sure if we’ll
see a repeat or continuation of these returns.
To be transparent, I have no plans to purchase this fund, and I will personally be sticking
with ARKK for my tech and growth allocation.
But, if you are thinking about looking further into BST, keep in mind that it does come with
a 1.09% expense ratio, and you’ll want to monitor the premium or discount to make sure
you’re getting in at a reasonable price.
I would highly recommend cefconnect.com for further research, so I’ll link to it and
the fund’s website in the description.
Before we wrap up, if BST piqued your interest, you may also want to look into the sister
fund, BSTZ.
This is the Science and Technology Trust 2, which uses almost an identical strategy to
BST.
The main differences are that BSTZ gives more allocation to international and small cap
stocks, which is higher risk but with potentially higher growth opportunities.
Additionally, they have a larger focus on private companies, which are typically otherwise
unavailable to the common investor.
Hopefully this video provided enough context to get you started on digging into BSTZ, but
if you have any questions I’d love to discuss in the comments.
Lastly, as always, be sure to check the description to get $50 at M1 finance, which is my favorite
investing platform.
It’s great for long-term investing and especially dividend investing, and you can find BST,
BSTZ and just about everything else you’ll need there.
Thanks for watching and I’ll see you in the next one.