STK CEF: Golden Standard of Technology CEF now very expensive

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Thesis

Columbia Seligman Premium Technology Growth Fund (NYSE: STK) is a “buy-write” closed-end fund. The vehicle has performed admirably over the past decade, increasing by over 461% in terms of total return and showing long periods of time when outperformed its benchmark, the Technology Select Sector SPDR Fund (XLK). The CEF has a 10-year Sharpe ratio of 0.85 with a standard deviation of 21.47% and has achieved an average annual total return of more than 16% over a 10-year look back:

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Average annual returns (fund fact sheet)

The fund presents an extremely attractive risk/reward analysis and enhances its returns by writing covered calls in the portfolio. According to the background literature:

Under normal market conditions, the fund’s investment program will consist primarily of investing in a portfolio of equity securities of technology and technology-related companies, as well as writing call options on the NASDAQ 100 Index or its exchange traded fund (ETF) equivalent on a month-to-month basis. The aggregate notional amount of call options will typically range from 25% to 90% of the underlying value of the fund’s common units. The Fund expects to generate current income from premiums received for writing call options on the NASDAQ 100 or its ETF equivalent.

While the hedged portion of the portfolio can vary from 25% to 90%, the fund currently has 89.9% of the portfolio overwritten, at the high end of the range:

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Overdraft percentage (fund fact sheet)

It should also be noted that the fund has a slight basis between the holdings (only 62 names in the portfolio at the moment) and the written calls that are made to the index. We like the fact that the fund concentrates on a smaller number of names compared to the index because it allows portfolio managers to generate alpha for the fund, an active management that has proven its value over time through its performance stellar

The fund has seen its biggest loss in a decade this year, falling more than -30% in early June. Its evolution has picked up, now “only” -15.6%, surpassing the index. Unfortunately, much of the fund’s outperformance since June is accounted for by the widening of the premium to parity rather than a “net” recovery in underlying asset prices:

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Price vs NAV (CEFConnect)

We can see in the chart above, courtesy of CEF Connect, that during the June sale the price dipped below NAV, but has now soared, trading at a 9.18% premium to the net value of the active This premium is close to the one-decade high of 10.63% seen for this fund, and in our view is unjustified. The vehicle typically trades at premiums of only 1% to 2% compared to net asset value.

We believe we are currently in the midst of a bear market rally, driven by significant oversold conditions and earnings that came in better than expected from a low threshold to begin with. Inflation is still not coming down, it’s actually surprising other way round. The Fed isn’t done hiking and rates will stay higher for a while longer. This is a relief rally that will change as market participants realize that a favorable Fed shift is much further away than expected and that the discount rate that will be used for tech stocks will be higher. We expect another pullback in this market that will not only result in a lower NAV move for STK, but also a compression of the premium to pars, as we saw strongly in June. We are targeting a -10% to -15% move in STK over the next few months. We don’t mince our words: STK is a top-tier technology CEF and a gold standard in the space thanks to its performance, but it’s currently priced very high thanks to its premium and won’t be able to escape the gravity of the next stage . bear market

holdings

CEF falls into the large-cap/growth category, as illustrated by Morningstar:

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Morningstar Box (Morningstar)

For those readers not as familiar with Morningstar’s categorization nomenclature, please find the fund fact sheet below:

The Morningstar Style Box is based on the fund’s portfolio holdings at the end of the period. For equity funds, the vertical axis shows the market capitalization of the stocks owned, and the horizontal axis shows the investment style (value, mix or growth). The information shown is based on the most recent data provided by Morningstar.

The CEF is heavily focused on technology, with an overweighting of semiconductor stocks:

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Main sectors (fund fact sheet)

We can see from the table above that, compared to the index, the fund overweights Semiconductor stocks and technology hardware storage, while underweighting software, IT services and interactive media.

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

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Participations (fund information sheet)

The fund has a fairly conservative portfolio from a valuation point of view, with fairly low P/E ratios compared to the general sector:

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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 mirrored the performance of XLK and is currently outperforming the index.

Over five years, STK shows a slight underperformance compared to the index, but still a very robust overall performance:

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Total return at 5 years (five)

We can see that STK is up 121% versus 166% for the index. A decade-long chart shows why STK represents a gold standard in the CEF technology space, with the fund matching the index in a 10-year look back:

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10-year total return (seeking alpha)

What is interesting to note is that the fund had significant periods of outperforming the index during 2016-2018.

Premium / Discount to NAV

The fund normally trades at a premium to net asset value:

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Premium/Discount to NAV (Morningstar)

We can see that looking back ten years, the fund posted a peak premium of 10.63% in 2017, while on average the fund’s premium is only close to 1%-2%.

conclusion

STK is a technology-focused equity “buy-write” fund. The vehicle has stellar long-term results, with an average annual total return of over 16% over a ten-year period. The vehicle has only 62 holdings compared to the index and is currently writing covered calls on nearly 90% of its portfolio. The fund has rebounded from a -30% draw earlier in the year, but its move up has been driven primarily by a widening premium to net asset values ​​rather than a “net” gain of the value of the underlying fund’s assets. STK is currently trading at a premium near its all-time highs, while it showed a discount to NAV during the June market sell-off. We believe we are currently in the midst of a bear market rally, driven by significant oversold conditions and earnings that came in better than expected from a low threshold to begin with. We expect another pullback in this market that will not only result in a lower NAV move for STK, but also a compression of the premium to net asset values, similar to what we saw in June.



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About the Author: Chaz Cutler

My name is Chasity. I love to follow the stock market and financial news!