BlackRock North American Income Trust (BRNA) is a value-orientated income strategy, seeking to achieve a balance between capital growth and income yield. The trust offers investors strong income potential, not just through the revenues of its underlying holdings but also through the trust’s ability to pay income out of its capital and its use of option writing (outlined further in the Dividend section).
BRNA is run by a highly skilled team of senior portfolio managers – Tony DeSpirito, Franco Tapia and David Zhao – who have been managing the portfolio as a team since September 2017. They leverage BlackRock’s well-resourced US income & value team, with Franco and David leading the broader US analyst teams and Tony acting as CIO of US fundamental active equities. As we discuss in the Portfolio section, their process is one which focusses on value, income and income growth. BRNA’s portfolio is constructed in a barbell manner, allocating stocks to either stability or cyclical value buckets.
Since Tony DeSpirito assumed management responsibilities in August 2014, BRNA has returned an NAV performance of 104.1%, compared to the 98.8% of its benchmark and the 96.6% of its peers. However, the performance of BRNA has lagged that of its peers over the last year, with the market being increasingly driven by the growth sector, which BRNA actively avoids.
Despite its underperformance BRNA trades at a narrower discount than its income focused peers, a result of its superior income potential. While the managers feel the discount is a result of investors’ lack of appetite for US value stocks, they believe there are major tailwinds on the horizon which could support a value rally.
We believe BRNA offers investors something increasingly scarce: a disciplined, dedicated and consistent approach to US value investing. It is our view that the team are unwavering in their allocation to what they believe are the best value and income names in the US, something sorely needed in a market increasingly dominated by US growth strategies.
While BRNA’s performance has lagged over the last year, we believe it has delivered on its promises over the long run, being able to protect capital during periods of volatility or downturns while providing a superior dividend to its investors. This dividend is enhanced by the trust’s creative approach to income payouts, and its ability to both pay out of capital and write options gives it an edge over many other income-focussed trusts.
However, perhaps more attractive over the short term is the potential reversion of value’s underperformance, with BRNA being the most value-orientated trust in its AIC peer group. Outside of the factors we outline in the Performance section, we see near-term tailwinds supporting an economic recovery in the US. Namely, these are an increasing likelihood of economic stimulus under a Biden government, plus a renewed impetus to tackle the COVID-19 pandemic in the US. Both factors are likely to energise economic activity, which could be the catalyst for a value rally. Such a rally could also be supportive of a narrowing discount, as BRNA has been a victim of a broad aversion to value as an investment style.
|Experienced team of senior portfolio managers, supported by well-resourced analysts
||Use of option writing can reduce capital returns
|Superior income potential from underlying revenue and the ability to pay out of capital and write options
||If the growth-driven market continues, so will the underperformance of BRNA
|Case for a reversion in the outperformance of growth over value
||Narrow discount relative to its closest income and value focused peers