BlackRock Income & Growth 05 June 2019
Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by BlackRock Income & Growth. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
BlackRock Income & Growth (BRIG) has twin aims of providing a rising dividend, but also growth in capital over the long term. Whilst BlackRock has only been running the trust since 2012, the team behind it has a much longer pedigree. They have run the same investment process for over 30 years, and (according to BlackRock) the BlackRock UK Income fund holds the impressive record of being the only UK OEIC that has increased its distribution each year for 30 years.
Speaking to co-manager Adam Avigdori recently, he commented on how well suited the trust structure was to their approach. He highlighted that a closed-end fund puts a manager in an ideal position to take controlled risk, and allows them to have strongly held views through a cycle. He feels this aids their investment approach, and together with the relatively small size of the trust currently (£46m of net assets) gives them a competitive advantage over peers, with huge flexibility to buy or sell companies of all sizes. As such, Adam believes BRIG is an ideal vehicle to deliver dividend growth for investors. As we discuss below, since 2012 the team have grown the trust’s dividend by 4.7% a year and built up a reserve equal to a year’s dividend.
Adam and David employ a high-conviction approach to stock picking, with the portfolio expected to have between 30 to 60 holdings at any one time - currently numbering 43. The team buy companies purely on an opportunity led basis, but try to provide some diversification across the portfolio through allocating across three “buckets”, defined by the broad type of investment opportunity. Yield and free-cashflow is typically expected to be the biggest allocation, of between 60-80% of the portfolio, currently 68%. The team also look for growth opportunities, expected to be between 10-30% of the portfolio, currently 23%. The final bucket is turnaround situations, expected to be between 0-10%, currently 9%.
A key differentiator to many other competitor funds and/or trusts is the multi-cap approach. Using the advantages conferred by the closed end structure and the relatively small size of the trust, the team opportunistically venture into the small and mid-cap (SMID) sphere where they have particularly high conviction – with no official maximum weighting. Currently c.18% of the portfolio is in SMID stocks, mostly found in the growth bucket of the portfolio.
Performance over the past five years is impressive, with the trust c.8% ahead of the benchmark but also beating the average investment trust peer by 4.6% and the average open-ended peer by 10.6%. 2014 and 2015 were both very strong years of outperformance, but 2016 proved to be a more difficult environment – with miners rallying hard – an area which the managers have had a long term underweight. Over the past 12 months (to 23 May 2019), BRIG is behind the FTSE All Share by 0.6%. Several stock specifics impacted the portfolio last year, which have so far more than been made up for by calendar year performance to date.
Outside of total returns, BRIG’s raison d’etre is to provide a growing dividend over time. As such, since being awarded the mandate in 2012, the BlackRock team have grown the trust’s dividend by 4.7% a year and built up a reserve equal to a year’s dividend. The trust’s headline yield of 3.7% is modestly lower than the UK Equity Income sector weighted average of 3.9% (source: JPM Cazenove). This reflects the manager’s desire to deliver sustainable dividend growth over time, which is evidenced by the impressive earnings growth delivered by the portfolio since BlackRock took over management of 7.7% pa.
The board has been employing an active discount control mechanism for over five years, and the discount currently stands at a historically wide level of 5.6%. Over time, discount volatility has been relatively low, with the trust’s discount having been broadly in-line with the UK Equity Income sector.
BRIG remains a hidden gem for income investors, evidenced by the team's resolute focus on earnings growth and free cashflow, and their strong performance relative to peers and the benchmark over five years.
The sustainability of dividend growth is illustrated by the trust’s earnings per share growth of 7.7% per annum since they were awarded the mandate, significantly outpacing the growth in dividends of 4.7% pa. As a result, the board continues to have room for manoeuvre in paying dividends should the portfolio suffer a short-term earnings shock.
The team employ a true stock-picking approach, and use the advantages of the investment trust structure to help them achieve their objectives - including using opportunistic investments in small and mid cap stocks, and a dynamic approach to gearing. At the same time, the board has an active discount control policy, which results in low discount volatility and a liquidity profile which is much better than the trust's size would suggest.
|Strong earnings growth since managers awarded mandate
|Lower yield than average of peers
|Disciplined investment process, with fully resourced team
|Current small size of trust means higher OCF than peers
|Low discount volatility