BlackRock North American Income Trust aims to provide an attractive and growing level of income, with capital appreciation over the long term.
The managers, Tony DeSpirito (lead manager), Franco Tapia (co-manager) and David Zhao (co-manager), utilise a bottom up stock specific approach to managing the portfolio. The team starts with a universe of the 500 largest US companies by market cap, searching for attractively valued, high quality companies with histories of dividend growth. Currently the portfolio is made up of just 81 holdings. Illustrating the valuation led approach, the average company in the portfolio has a P/E of 13.8x, relative to the average in the benchmark Russell 1000 Value Index of 14.5x.
Since Tony DeSpirito took the helm of the portfolio towards the end of 2014, the trust has seen a marked improvement in performance. Over three years (to the end of May 2019) the trust has generated 47.2% in NAV returns, outperforming the Russell 1000 Value Index (42.2%) and only narrowly trailing the average trust in the AIC North American sector (53.4%). The trust has now outperformed the benchmark in three of the past five calendar years. This has been achieved with lower levels of volatility and over the past year the trust has the second lowest beta of the two AIC North American sectors, sitting at just 0.82.
Alongside the potential for capital appreciation, one of the key draws for investors is the robust income, with the shares currently yielding 4.5%. The dividend saw a dramatic increase last year, when the board increased its dividend by 61.6% to 8p per share. Part of this is paid from capital reserves, but is also supplemented through option writing, headed by the BlackRock Equity Derivatives option team in Boston.
The strong performance, defensive characteristics and now very significant dividend yield have had a clear impact on demand for the shares. The discount has narrowed and the trust currently trades at a premium of 2.8%.
BlackRock North American Income has been a real turnaround story over the past five years. Having struggled in the first few years of the trust’s life, the new team has come into their own and demonstrated that it is possible to generate capital appreciation and income through quality and valuation driven research, in a growth orientated North American setting.
In the current volatile environment the trust appears a stand out candidate for more cautious investors. Over the past year the trust has the second lowest beta of the two AIC North American sectors and over five years the beta is just 0.9, relative to the average of 1.03 across both the AIC North American sectors. Looking at the annualised standard deviation, the trust boasts the lowest volatility in the two sectors over both one (16.3%) and five years (10.4%), where the average is 23.3% and 14.0% respectively.
As such, given the uncertain environment for US equities, we are not surprised that the trust has started trading on a premium, and believe that should the trust slip to the slightest discount it would present an attractive entry point for investors.
|Strong track record of delivering total returns
||Trading at a premium
|Now yielding 4.5%, with the Board having increased the dividend by over 60% last year
||Current uncertainty surrounding US market conditions
|Low levels of volatility are ideal for the current uncertain environment