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STK CEF: Golden Standard of Technology CEF Prices Soar

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established theory

Columbia Seligman Premium Technology Growth Fund (New York Stock Exchange: STK) is an equity “buy-right” closed-end fund.The vehicle has performed admirably over the past decade, with his gross revenue base up over 461% and over the long term. Benchmark Index Technology Select Sector SPDR Fund (XLK). The CEF has a 10-year Sharpe ratio of 0.85 with a standard deviation of 21.47%, managing an average annual total return of over 16% over the 10-year lookback.

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Average Annual Return (Fund Fact Sheet)

This fund exhibits a very attractive risk/reward analysis and enhances returns by writing covered calls in the portfolio. According to the Foundation literature:

Under normal market conditions, the Fund’s investment program consists primarily of investments in technology and technology-related company equity portfolios and call options on the NASDAQ 100 Index or equivalent exchange-traded fund (ETF) funds. . monthly basis. The aggregate notional amount of call options generally ranges from 25% to 90% of the underlying value of common stock held by the Fund. The Fund expects to generate current income from premiums it receives for issuing call options on the Nasdaq 100 or equivalent ETFs.

The covered portion of the portfolio can vary from 25% to 90%, but the fund currently overwrites 89.9% of the portfolio.

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Overwrite Rate (Fund Fact Sheet)

Also note that the fund has little rationale between holdings (currently only 62 stocks in portfolio) and written calls made in the index. I like the fact that the fund concentrates on a smaller number of names compared to the index. This is because it allows the portfolio manager to generate alpha for the fund. Active management has always proven its worth through superior performance.

The fund has experienced its biggest drawdown in a decade this year, dropping more than -30% in June. Its performance has recovered and is now down 15.6%, outperforming the index. Unfortunately, most of the fund’s outperformance since June has been represented by a widening premium to face value rather than a “clean” recovery in the underlying asset price.

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Price vs NAV (CEFConnect)

From the chart above (courtesy of CEF Connect), we can see that the price fell below NAV during the June crash, but is now surging and trading at a 9.18% premium to net asset value. This premium is close to his 10.63% high seen in this fund, which in our opinion is unjustified. Vehicles typically trade at a premium of only 1% to 2% over net asset value.

We believe we are currently in the middle of a bear market rally. This is due to the significantly oversold conditions and the higher than expected return from the low initial threshold. Inflation hasn’t calmed down yet and is actually on a surprising upward trend. The Federal Reserve has not completed the rate hike and rates will remain on hold for longer. This will be a rally of relief as market participants realize the Fed’s dovish shift is far ahead of expectations, leading to higher discount rates used for tech stocks. As seen in June, not only is STK’s NAV dropping, but we expect further declines in this market that will result in premiums being compressed to face value. We are targeting a -10% to -15% move in STK over the next few months. Stop chopping words – STK is the best tech CEF and the gold standard in its field due to its performance, but it is currently very overpriced due to its premium and will not escape the gravity of the next descent. bear market.

Holdings

As shown by Morningstar, CEF falls into the Large Cap/Growth category.

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Morning Star Box (Morning Star)

For those readers less familiar with Morningstar’s taxonomic nomenclature, find the following from the fund’s fact sheet.

Morningstar-style boxes are based on the Fund’s portfolio holdings at the end of the period. For equity funds, the vertical axis represents the market capitalization of the holdings and the horizontal axis represents the investment style (value, blend, growth). The information displayed is based on the latest data provided by Morningstar.

The CEF is tech-focused and overweight semiconductor stocks.

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Top Sector (Fund Fact Sheet)

From the table above, we can see that the fund is overweight semiconductor stocks and tech hardware storage, while underweight software, IT services and interactive media to the index.

The fund’s top holdings include Lam Research and Apple.

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Holdings (Fund Fact Sheet)

The fund manages a fairly conservative portfolio from a valuation standpoint, with a fairly low P/E ratio when compared to the sector as a whole.

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Portfolio Characteristics (Fund Fact Sheet)

performance

The fund is down 15.6% year-to-date.

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YTD Performance (Seeking Alpha)

We can see that STK closely mirrors the performance of XLK and currently outperforms the index.

On a 5-year basis, STK shows a slight underperformance against the index, but still a very solid overall performance.

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5-year total return (5)

We can see that STK is up 121% compared to 166% for the index. A decade-long chart shows why STK is the gold standard in the tech CEF space.

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10-year total return (seeking alpha)

An interesting point to note is that during the period 2016-2018, the fund outperformed the index significantly.

Discount to Premium / NAV

Funds typically trade at a premium to net asset value.

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Premium/discount to NAV (Morningstar)

In our 10-year retrospective, we can see that the fund showed a premium of up to 10.63% in 2017, but on average the fund’s premium was only closer to 1% to 2%.

Conclusion

STK is a technology-focused equity “buy-right” fund. The vehicle has shown excellent long-term performance with an average annual gross return of over 16% over a 10-year lookback period. This vehicle has only 62 holdings against the index and is currently writing covered calls in almost 90% of the portfolio. The fund recovered from a -30% drawdown at the beginning of the year, but its rally was largely driven by a widening premium to net asset value rather than a “clean” rise in the value of underlying fund assets. STK is currently trading at a premium close to its all-time high, but showed a discount to NAV during the market crash in June. We believe we are currently in the middle of a bear market rally. This is due to the significantly oversold conditions and the higher than expected return from the low initial threshold. This market is expected to result in not only a drop in his NAV for STK but also a compression in the premium to net asset value similar to what we saw in June.