Back in May, I wrote an article covering BlackRock Science and Technology Term Trust (NYSE:BSTZ) titled BSTZ: I Am Buying The Deep Discount In This Fund and I must admit that the fund hasn’t performed very well since then. When I wrote that article, the fund was underperforming Nasdaq, and it still is.
One of the reasons this fund has been underperforming is because of its focus on smaller-cap companies. This fund’s sister fund BlackRock Science and Technology Trust (BST) performed better because it was focusing on large-cap technology stocks as opposed to this fund. Then again, BST also underperformed Nasdaq this year, which was easy to do when you consider that Nasdaq is up about 50% year to date so far and most of it is driven by 7 stocks also known as the Magnificent Seven.
BSTZ continues to enjoy a deep discount against its NAV. If anything, the fund’s NAV discount widened even further since the last time I wrote about it. The fund now trades at a 20.5% discount against its NAV, which is close to an all-time high for this fund during its short lifespan so far. Since the fund will distribute about 6% of its NAV every year in dividend distributions, we are going to be looking at a forward yield of 7.5% based on its NAV discount and if the fund makes more money, it will be reinvested into NAV which should translate into higher share price. Will the fund ever erase its NAV discount? We don’t know for sure. Some CEFs trade at a discount for a short period of time and erase that discount while other CEFs always seem to trade at a discount which I call “Chronic NAV Discounters”. Then there are other funds that almost always trade at a premium such as CLM, but BlackRock’s funds rarely do that. One thing for certain though. This fund has a term date of June 26, 2031 on which it can dissolve at the NAV price. If that happens, investors will receive a cash payment equivalent of the NAV price at the time. I can expect this fund to trade at a closer price to its NAV value as that date nears, but there is plenty of time until then and that date can always be extended with a shareholder vote, so things can always change anyway.
This fund invests close to 40% of its assets into private companies. These are companies that don’t trade publicly. Some of them might be preparing to file their IPO in the near future while others might be waiting to be acquired. Others might simply stay as private companies, with no intention or anticipation to ever raise capital by going public or getting acquired. Being invested in a fund that invests into private companies can have its advantages because it allows you to gain exposure to companies that most retail investors couldn’t otherwise gain exposure to. On the other hand, this also raises the level of uncertainty out there. First, it complicates how a fund calculates its NAV because it’s not easy to calculate the exact value of a private company since it has no stock price or market cap. Typically, analysts will estimate a private company’s value based on their latest capital raise, but that could be months or even years ago. We could have private companies whose value hasn’t changed in a long time.
For example, if a private company last raised capital back in 2021 when people were in love with small-cap technology stocks and IPOs were wildly successful, its estimated value might be based on those “glorious days” rather than today when investors have little appetite for anything except well-established mega-cap stocks who dominate their markets single-handedly.
Alternatively, we can look at IPO funds such as the Renaissance IPO ETF (IPO) to estimate how much potential appetite there is in the market for IPOs right now. Typically, there is a strong correlation between the two.
Not only that, but look at the chart below, and you will see a pretty strong correlation between IPO ETF and BSTZ. When one rises, so does the other, and when one drops, so does the other, which makes sense based on what I explained above. The correlation is so strong that you might as well call BSTZ an IPO fund in my opinion, since it holds a lot of companies that are either pre-IPO or recent IPOs. This is not necessarily a good or bad thing, though. It could be a good thing when there is a lot of appetite for IPOs, and a bad thing when there isn’t.
Small-cap tech stocks and IPO-type of stocks have been doing pretty badly since late 2021. This is also very visible in Cathie Wood’s ARK funds such as ARKK, ARKW, and ARKQ as these funds hold a lot of these stocks. If you listen to the conventional wisdom, you want to buy a sector or type of asset when no one else is buying it because that’s when you can get them at a deep discount. You don’t want to buy them at times like early 2021 when everyone was buying them and most likely not paying attention to things like profitability or valuations. Maybe this may be a good time to buy these types of stocks after they sold off for 2 years straight and some of them are down as much as -90% from their 2021 highs. I am not saying you should be buying the below stocks, I am just showing them below as a demonstration of how much some stocks fell since 2021.
What is BSTZ holding these days anyway? When you look at the fund’s top 10 holdings, you might feel like you are looking at a classified CIA document because it lists project names as companies such as Project Debussy, Project Bond, Project Picasso, and Project Sibelius. These are pre-IPO private companies. Project Debussy refers to Databricks which BSTZ invested in back in 2019, Project Bond refers to ByteDance which is known for TikTok, Project Picasso refers to a semiconductor firm called PsiQuantum, and so on. The fund also seems to hold a couple of big tech companies such as Nvidia (NVDA) and Tesla (TSLA) but the majority of its holdings are much smaller.
The fund also writes covered calls against 25% of its positions, which is where the dividend comes from. In the last quarter, the fund increased its exposure to semiconductor stocks related to AI, so it looks like the fund’s management believes in the acceleration of AI adoption in the coming years. If you share this belief as well, you might want to gain some exposure to this fund.
We’ve seen many big tech stocks already climb to new highs based on AI optimism, such as Microsoft (MSFT) and Nvidia, but AI-related small-cap stocks haven’t taken off as much, and they might still have room to run if this AI thing turns into something major. During the gold rush, those who sold shovels, axes, and picks to gold rushers made as much money as the average gold digger, so tools matter when it comes to revolutionizing the world.
I’m still long this fund and still optimistic about it, but I also learned to be more patient with it. If this fund is going to outperform, it won’t happen overnight and it will take some time. Luckily the fund has a nice dividend yield of 7.5% which means you get paid while waiting, and it only writes covered calls on a small portion of its holdings which means you will still get to participate in the upside when it eventually comes.