BlackRock Income & Growth 11 December 2019

BlackRock Income & Growth (BRIG) targets growth in both income and capital over the long term. With an extensive team that also runs a successful open-ended UK equity income product, BlackRock have been running BRIG since 2012; the open-ended fund has successfully increased its distribution every year for the past 30 years.

Whilst there is significant overlap between the trust and its open-ended relation, the managers, Adam Avigdori and David Goldman, are keen to take best advantage of the trust structure for this product. The managers have greater scope to invest in smaller, less liquid names, enabled by the closed-ended structure and relatively modest size of BRIG’s assets (c. £50m) enables, balancing opportunities for both capital and income growth - read a detailed overview of BRIG's portfolio construction.

Income is an important feature of the trust, but the management team are equally concerned with growing distributions as with providing a headline yield. Whilst the portfolio’s overall level of income is considered important, not all stocks are expected to contribute to it.

The managers seek to run a concentrated portfolio of around 40 stocks, and to ensure that stock-specific factors are the main driver of returns. Portfolio construction places stocks into three ‘buckets’:

1. Yield & free cash flow opportunities;
2. Growth opportunities; and
3. Turnaround opportunities.

The portfolio is heavily weighted towards the first category, but around 20-40% will be held in the latter two buckets, which the managers believe can help drive capital growth.

Recent performance has improved, driven in large part by stock-specific factors, with previous sector headwinds proving less of a factor in 2019 thus far. BRIG has successfully grown its dividend under the stewardship of Adam and David, with total growth significantly outstripping inflation since BlackRock took over management of the trust. The present yield of c. 3.6% is well covered, with sizeable revenue reserves. Click here to find out more about the trust's dividend policy.

The board operates an active discount control policy, looking to buy back shares tactically when the trust is trading on a discount to net asset value (NAV), and reissue them from treasury when the trust is at a premium. This has helped contribute to reasonably constrained discount volatility, as we discuss in more detail here.

BRIG continues to offer a reasonable level of yield which is well covered and shows signs of sustainable growth. The portfolio has structured elements to construction, but reasonable flexibility is afforded to the managers on their rationale for investing in companies from a bottom-up perspective. By seeking to ensure a significant amount (or majority) of portfolio risk is stock-specific, they improve the likelihood of ensuring that their analysis, and that of the deep pool of experience sitting behind them in BlackRock’s UK Equity team, can have a consequential effect on portfolio performance, accentuated and aided by their commitment to running a reasonably constrained number of stocks.

Intervention from the board with regards the discount is positive, but the trust now holds a significant proportion of issued shares in treasury. The trust structure offers greater opportunity to take advantage of the less liquid opportunities the team may identify, and as such should be more resilient and differentiated to the income streams that open-ended peers in the UK Equity Income sector are able to provide.