BlackRock Sustainable American Income 31 October 2018

BlackRock North American Income Trust (BRNA) has a diversified portfolio comprised mainly of US equities, focused on the 500 largest stocks by market cap. The company’s objective is to provide an attractive and growing level of income return with capital appreciation over the long term. The managers have a low-turnover approach, and a strong focus on valuation, aiming for well-established cash generative companies with clear revenue streams and the potential for dividend growth.

The board announced plans in December last year to boost the dividend the trust pays by paying a small proportion from capital, and have specified a quarterly dividend of 2p per share for the current financial year. As such the trust currently offers a yield of 4.6%, putting it comfortably ahead of all of its comparable peers in the AIC North America sector on yield terms (excluding the highly idiosyncratic, and therefore probably not comparable, Middlefield Canadian Income trust).

The trust was launched in September 2012 and, because of its focus on quality and valuations, had a rocky start, underperforming the index in 2013 and 2014 as bond proxies and financials raced ahead. Stock selection also played a part. Since then, Tony DeSpirito, David Zhao and Franco Tapia turned the performance around, focusing particularly on formalising the investment process. This has involved increasing the number of staff in the team, as well as developing a new quant screen to ensure opportunities are flagged up more rigorously. The team now consists of 21 investment professionals, with on average over a decade’s worth of experience. The trust outperformed the index in 2015 and then kept pace with it in 2016. More latterly, BRNA produced almost double the return in NAV terms of the Russell 1000 Value index in 2017, and has comfortably outperformed the benchmark so far in 2018.

Over the past year the discount has been relatively volatile, ranging between c.-10% and -2.3%. At the time of writing, the discount is -2.5%, with the consistent outperformance since 2015 helping to improve sentiment towards the trust.

BRNA remains relatively small with net assets of £121m but it offers a very high yield, and this may increase its appeal to larger investors who might otherwise consider it too illiquid to be an option, particularly given the board’s demonstrable willingness to buy back shares.

We see BlackRock North American Income Trust (BRNA) as a trust that does exactly what it says on the tin. The portfolio is well diversified and has a long-term track record of providing both capital appreciation, and an attractive income.

BRNA has been a reasonably consistent performer in the AIC North America sector. Over five years, the trust has outperformed the average annualised return of 14.5%, and this has been achieved at the lowest level of standard deviation (9.7%). The performance has also been sturdy over 2018, with the manager adding an alpha of 0.12. Again, the has been done at a lower than average standard deviation, but this time with an impressive Sharpe ratio of 1.05.

When comparing the trust to its open-ended counter parts in the IA North America Sector, the trust sits in the middle of the pack on most metrics over the past five years. With that having been said, the team at BRNA have managed to achieve the 11^th lowest standard deviation (of c.150 funds), whilst delivering annualised returns of 15.17%.

Given the trust’s strong yield, increasingly confident performance and depth of resource, we believe the current discount to NAV represents an opportunity.