BlackRock North American Income Trust (BRNA) currently offers investors a portfolio of North American large-cap value companies, balancing capital growth and income provision. However, the board is seeking shareholder approval to alter the strategy, incorporating a substantially greater emphasis on ESG and sustainability as well as freeing up the managers to add additional value.
ESG will be further integrated through a number of ways, the first being the proposed use of an ESG screen, which will filter out the worst offenders. Next the team will aim to keep BRNA’s ESG scores superior to those of its benchmark, as well as having a lower carbon intensity score. Beyond these targets the team will look to add additional upside by identifying companies whose ESG credentials have been underappreciated by the market, and thus have the potential for a positive re-rating.
The team will also be able to invest in mid-cap stocks under the new proposal, increasing the range of potential ‘best ideas’ available to the managers. They will also aim to have a more concentrated portfolio, to focus the trust around the managers’ highest conviction stocks. The proposed changes to BRNA’s portfolio are outlined in more detail in the Portfolio and ESG sections. Regardless of the future change in policy, the last 12 months have seen a resurgence in the fortunes of value stocks, as we describe in the Performance section, with BRNA having closed the performance gap to the wider US market.
While the changes have the potential to impact BRNA’s underlying revenues, as we outline in the Dividend section, BRNA has the ability to fund its dividend through its capital account which may offset the loss in revenue. As a result of the potential changes, the board will no longer pursue a progressive dividend, though in practice they aim to maintain the dividend at the least. The trust yields 4.1% on a historic basis and currently trades on a 5.4% discount.
We believe that the proposed changes to BRNA should benefit shareholders overall. Beyond simply aligning the portfolio with the ethical demands for a more sustainable society, we view the changes as improving the overall potential return BRNA can offer shareholders. By opening up the opportunity set to mid-cap stocks, and increasing its concentration, BRNA will be structured to better capitalise on the skills of the managers. Together with BRNA’s long-term performance and above-market yield we think this creates a powerful proposition.
We also believe that this shift towards a more sustainable investment profile shows the board’s commitment to keeping the trust relevant to the changing market demands, as ESG is becoming an ever increasingly important topic for investors. We note that within the closed-ended trust space there are few dedicated value strategies, and arguably no sustainable value strategies. This means that if the vote is successful BRNA will offer investors a new style of investing within the closed-ended space. We think this should improve the overall attractiveness of the strategy, especially as there are even fewer sustainable value strategies in the open-ended space.
Given the market gap BRNA may soon fill, we believe that the potential change in strategy may be the catalyst BRNA needs to narrow its discount. We note BRNA was trading at a premium prior to the pandemic crash.
|Potential change in strategy may improve overall return profile||Could be less exposed to value with the addition of an ESG strategy|
|Becoming a sustainable value strategy may fill a niche in the fund market, narrowing the discount||The proposed use of gearing would increase losses during falling markets|
|Value stocks have entered a period of strength due to the pandemic recovery||More concentrated portfolio may mean higher NAV volatility|