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Disclosure – Non-substantive Research

This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. With this commentary, Kepler Partners LLP does not intend to influence your investment firm's behaviour. 

Overview
A differentiated source of equity income from a focused portfolio of US equities…
Overview

The North American Income Trust (NAIT) is a £427m investment trust which aims to generate a steady, growing income and capital growth over the long term. Managed by Ralph Bassett and Francis (Fran) Radano, the trust has seen its discount narrow sharply this year as it moved to split stock five-for-one – making it easier for small investors to buy.

Offering a yield of 2.8% the trust is one of two US-focused trusts which aim to generate income, achieving that via a focused portfolio of equities and bonds, mainly investing in large well-established businesses with strong records of capital deployment.

In addition to equities and bonds the managers also use derivatives at the margin to boost the portfolio’s income. The managers have grown the dividend by 9% per annum over the past five years, while at the same time building a significant revenue reserve where, five years ago, there was virtually none.

In performance terms the trust has delivered strong returns since Ralph and Francis took over in June 2015, generating NAV total returns of 79.6% against a rise of 61.7% in the Russell 1000 Value index. Shareholders have benefited further from a closing discount which means in share price terms the trust is up 104.6% over the same period.

Since the early summer 2019, NAIT has been trading at a premium to NAV, following a steady re-rating that it has enjoyed since the start of the year. The trust is now issuing shares, which we would argue is a positive development for all shareholders. Given the tiered management fee, the OCF should start to reduce meaningfully if share issuance continues.

Kepler View

NAIT is an interesting diversifier for investors seeking an income who would like to find it outside the ‘usual suspects’ of UK equity income. Alongside this, it has outperformed the benchmark handsomely since the managers took over the mandate.

Given the highly concentrated nature of UK dividends – with a small number of companies appearing in many of the UK’s most popular UK equity income funds – we think NAIT makes sense for UK investors seeking new sources of income.

In our view the managers have done a good job building up a significant revenue reserve where there was none five years ago, all while delivering strong dividend growth. This bolsters prospects for a stable or growing dividend going forward, in our view. In this context, the share price re-rating NAIT has experienced is justified, and shareholders stand to benefit (assuming share issuance continues) from a lower OCF as the trust grows.

bull Bear
An excellent diversifier for UK income investors The yield is relatively low compared to a UK-focused equity income fund
Strong interest from retail buyers should continue to support the share price rating US large caps are at record valuations, so there could be some downside here
Impressive 9% annualised increase in dividends over the past five years Dollar weakness could negatively affect ability to grow dividends further
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