The Right High Yield Tech Fund At The Wrong Time
Valuations Have Become Very Stretched
Every week, we’ll profile a high yield investment fund that typically offers an annualized distribution of 6-10% or more. With the S&P 500 yielding less than 2%, many investors find it difficult to achieve the portfolio income necessary to meet their needs and goals. This report is designed to help address those concerns.
Throughout 2023, but especially in the past few weeks, tech stocks have become all the rage again. Led by the potential of AI, the Nasdaq 100 index has recovered about ⅔ of its losses from the 2022 bear market. While that’s a positive for investors who hung on throughout the correction, valuations have become very stretched once again and today looks like the closest thing we’ve seen to a bubble since around 2000.
Investors targeting high yields through closed-end funds have probably missed out on a lot of the rally, but there are a few equity-focused funds that were positioned well. The Columbia Seligman Premium Technology Growth Fund (STK) may be the best example since it targets both the sector and style that have been in favor for months. It adds in a covered call strategy to pursue a high yield along with the tech exposure, but two primary questions remain. Is the current tech & AI bubble ready to pop and, if not, is STK a viable way to be invested.
Fund Background
STK targets long-term capital appreciation and current income with a portfolio of technology stocks and an option overlay strategy designed to mitigate downside volatility and generate income. The management team can maintain an overwrite percentage of between 25% to 90% of the notional value of the fund’s holdings. Calls are typically written using Nasdaq 100 index options.
The overlay strategy is modified according to market volatility at any given time. As the VIX goes lower, STK lowers its overwrite percentage to add risk to the portfolio. As the VIX rises, it increases the call option overlay to add a bit of protection to the fund.
Investors don’t typically go into closed-end funds based on their focus on fundamental analysis, but that’s what we get with STK. The tech sector exposure obviously comes with inherent volatility, but the consideration of valuations, bottom-up fundamentals and GARP are very attractive in the current environment. The specific focus on stock selection over industry exposure is likely the better method of portfolio construction since there are so many factors that will impact companies differently in today’s economy. As we’ll see when we dive into the fund’s specific holdings, there’s less of a focus on the sector’s more speculative, high potential names and more so on those companies that are developed and durable, but not as “sexy”.
Keep reading with a 7-day free trial
Subscribe to The Lead-Lag Report to keep reading this post and get 7 days of free access to the full post archives.