STK CEF: Golden Customary Of Expertise CEFs Now Overpriced

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Thesis

Columbia Seligman Premium Expertise Development Fund (NYSE:STK) is an fairness “buy-write” closed finish fund. The automobile has carried out admirably up to now decade, being up greater than 461% on a complete return foundation, and exhibiting lengthy durations of time when it outperformed its benchmark index, the Expertise Choose Sector SPDR Fund (XLK). The CEF has a 10-year Sharpe ratio of 0.85 with an ordinary deviation of 21.47% and has managed common annual whole returns over 16% on a 10-year look-back:

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Common Annual Returns (Fund Reality Sheet)

The fund displays extraordinarily enticing threat/reward analytics and enhances its returns by way of writing lined calls on the portfolio. As per the fund’s literature:

Underneath regular market circumstances, the fund’s funding program will consist primarily of investing in a portfolio of fairness securities of expertise and technology-related firms in addition to writing name choices on the NASDAQ 100 Index or its exchange-traded (ETF) fund equal on a month-to-month foundation. The mixture notional quantity of the decision choices will sometimes vary from 25% to 90% of the underlying worth of the fund’s holdings of frequent inventory. The fund expects to generate present revenue from premiums acquired from writing name choices on the NASDAQ 100 or its ETF equal.

Whereas the lined portion of the portfolio can fluctuate from 25% to 90%, the fund at the moment has 89.9% of the portfolio overwritten, on the high finish of the vary:

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% Overwrite (Fund Reality Sheet)

Additionally, to notice that the fund has a slight foundation between the holdings (solely 62 names within the portfolio at the moment) and the written calls that are completed on the index. We like the truth that the fund is focused on a smaller variety of names when in comparison with the index as a result of it permits the portfolio managers to generate alpha for the fund, energetic administration which has confirmed its price all through time by way of its stellar efficiency.

The fund has skilled its largest decade lengthy drawdown this yr, being down greater than -30% earlier in June. Its efficiency has rebounded, now down “solely” -15.6%, outperforming the index. Sadly, a big portion of the fund’s outperformance since June is represented by the widening of the premium to par fairly than a “clear” restoration within the underlying asset costs:

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Worth vs NAV (CEFConnect)

We will see from the above graph, courtesy of CEF Join, that throughout the June sell-off the value dipped beneath NAV, however has now shot up, buying and selling at a premium of 9.18% to web asset worth. This premium is near a decade lengthy excessive of 10.63% seen for this fund, and in our opinion it’s unwarranted. The automobile often trades at premiums of only one% to 2% versus web asset worth.

We consider we’re at the moment within the midst of a bear market rally, triggered by considerably oversold circumstances and earnings which got here in higher than anticipated from a low threshold to start with. Inflation just isn’t but coming down, it’s really shocking to the upside. The Fed just isn’t completed climbing and charges will keep greater for longer. This can be a reduction rally which is able to flip as market members notice a Fed dovish shift is far farther away than anticipated and that the low cost price for use for Tech shares can be greater. We anticipate one other leg down on this market which is able to outcome not solely in a NAV transfer decrease for STK but in addition a compression of the premium to par values, as we dully noticed in June. We’re concentrating on a -10% to -15% transfer in STK within the subsequent months. Allow us to not mince our phrases – STK is a premier expertise CEF and a golden commonplace within the area by way of its efficiency, however it’s at the moment very overpriced by way of its premium and it won’t be able to flee the gravity of the subsequent leg down on this bear market.

Holdings

The CEF falls within the Massive Cap / Development class as illustrated by Morningstar:

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Morningstar Field (Morningstar)

For these readers that aren’t that acquainted with the Morningstar categorization nomenclature, please discover beneath from the fund’s truth sheet:

The Morningstar Fashion Field relies on the fund’s portfolio holdings as of interval finish. For fairness funds, the vertical axis exhibits the market capitalization of the shares owned, and the horizontal axis exhibits funding model (worth, mix, or progress). Info proven relies on the newest information supplied by Morningstar.

The CEF is closely Expertise targeted, being obese Semiconductor shares:

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Prime Sectors (Fund Reality Sheet)

We will see from the above desk that, versus the index, the fund is obese Semiconductor shares and Tech {Hardware} Storage, whereas underweight Software program, IT Providers, and Interactive Media.

The highest holdings within the fund embody Lam Analysis and Apple:

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Holdings (Fund Reality Sheet)

The fund runs a reasonably conservative portfolio from a valuation standpoint, with pretty low P/E ratios when in comparison with the general sector:

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Portfolio Traits (Fund Reality Sheet)

Efficiency

The fund is down -15.6% yr so far:

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YTD Efficiency (Looking for Alpha)

We will see that STK intently mirrored the XLK efficiency and is at the moment outperforming the index.

On a five-year foundation, STK exhibits a slight underperformance versus the index, however nonetheless a really strong general efficiency:

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5-Yr Complete Return (5)

We will see that STK is up 121% versus 166% for the index. A decade lengthy chart exhibits us why STK represents a golden commonplace within the expertise CEF area, with the fund matching the index on a 10-year lookback:

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10-Yr Complete Return (Looking for Alpha)

What’s fascinating to notice is that the fund had important durations of outperformance versus the index throughout the 2016-2018 timeframe.

Premium / Low cost to NAV

The fund often trades at a premium to web asset worth:

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Premium / Low cost to NAV (Morningstar)

We will see that on a ten-year look-back, the fund exhibited a most premium of 10.63% in 2017, whereas on common the fund premium is nearer to 1%-2% solely.

Conclusion

STK is a expertise targeted equities “buy-write” fund. The automobile has stellar long-term outcomes, with common annual whole returns exceeding 16% on a ten-year lookback interval. The automobile has solely 62 holdings versus the index and is at the moment writing lined calls on virtually 90% of its portfolio. The fund has turned from a -30% drawdown earlier within the yr, however its transfer greater has been primarily pushed by a widening of the premium to web asset values fairly than a “clear” achieve in worth for the underlying fund property. STK is at the moment buying and selling at a premium near its historic highs, whereas it exhibited a reduction to NAV throughout the June market sell-off. We consider we’re at the moment within the midst of a bear market rally, triggered by considerably oversold circumstances and earnings which got here in higher than anticipated from a low threshold to start with. We anticipate one other leg down on this market which is able to outcome not solely in a NAV transfer decrease for STK but in addition a compression of the premium to web asset values, much like what we noticed in June.

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