It’s been one year since we first added the BlackRock Science & Technology Trust II (BSTZ) to our portfolio — and this month we’re bringing back this smartly run closed-end fund for a second tour, asserts Michael Foster, editor of CEF Insider.
It’s not something we usually do, but when a fund is this underrated — BSTZ trades at a ridiculous 12% discount as I write this — and offers a rapidly growing dividend with a yield of 6%, it’s an opportunity that’s just too good to pass up.
If you’ve been a CEF Insider reader for more than a year, you’ll recall that we sold BSTZ just two months into our holding period, in May 2020, after riding it to a 22% total return as investors (belatedly) realized tech wasn’t going to get crushed by the pandemic.
We’ve got a similar disconnect in front of us today, because now, like then, investors think tech will be left behind — this time on the gains to be had in the recovery. And now, like then, we’re going to grab a position before the crowd comes to its senses.
BSTZ has another trick up its sleeve that makes it even more of a standout; It’s when you turn to the fund’s portfolio that the story gets really compelling.
Let’s start with No. 10 holding, Tokyo-listed Kakao Corp., which isn’t familiar to a lot of Americans but is a social-media mainstay in tech-savvy South Korea. No. 9 holding Twilio (TWLO) provides cloud-communications infrastructure that’s been in high demand since long before the pandemic. And of course, we all know Tesla (TSLA), Snap (SNAP) and Square (SQ).
But there are also some names on this list that sound pretty obscure, like C3 AI Inc. (AI), Project Kafka and Project Debussy. I’ve had some discussions with BlackRock about these, and I can report that a quarter of BSTZ’s portfolio is dedicated to private-equity investments, some of which are kept undisclosed.
These types of investments can explode in value: take BSTZ’s biggest holding, C3 AI. BSTZ bought in late 2019, when C3 was private and valued at $3.3 billion. Its market cap was recently at $7.5 billion, meaning a 130% total return on this investment alone in less than two years.
BlackRock Science & Technology Trust II has first-mover access to the best SPACs before they go public, nicely positioning it for big profits in a short period.
BSTZ has been doing well on this front, investing in high-tech firms in machine learning, semiconductor production and infrastructure — firms that will see higher demand as consumers return to shops, and businesses spend to build out their operations so they can better serve those rising numbers of customers.
All of this makes BSTZ worth buying now. Its strong management, track record and undeserved discount sweeten the deal further. Let’s dive into those.
BSTZ is a relatively new fund, having launched in June 2019. It’s managed by Tony Kim, Kyle McClements and Christopher Accettella, a trio that’s beaten the NASDAQ 100 for years with another BlackRock closed-end fund they also manage — the BlackRock Science and Technology Trust (BST), BSTZ’s sister fund.
BST was launched in 2014 and focuses on large-cap tech stocks. The trio has pulled off a similar performance with new addition BSTZ since its inception. With an assist from their private-equity and SPAC investments, they’ve run ahead of the NASDAQ and their own large cap fund, BST, too.
A 110% return in less than two years is enough to make just about any fee tolerable, but BSTZ’s 1.25% fee is actually lower than average for a CEF. Plus, BSTZ has gotten this return with zero leverage, making it even more impressive. Such a track record deserves a premium.
This is what’s happened with BSTZ’s older sister, BST, which trades at a 3.7% premium as I write this. That is clearly the future for the better-performing BSTZ, which is why its 11.8% discount, far bigger than the average 4.3% discount among all CEFs, makes the fund attractive now.
And there’s one more reason why this fund’s dividend is reliable, even in market corrections: covered calls. BSTZ will write options to get income from its equity holdings, with 22% of its portfolio overwritten with call options. This helps BSTZ profit off of volatility, meaning these rocky days for tech have actually made BSTZ’s dividend safer than before.
This strategy also helps BSTZ avoid selling during downturns, which is partly why the fund weathered the recent storm so well. It’s also part of the reason why BSTZ has never cut its dividend — and probably never will.