BlackRock Income & Growth 30 July 2020

BlackRock Income & Growth (BRIG) targets growth in both income and capital over the long term. BRIG has been run by the extensive team at BlackRock since 2012 which also runs a successful open-ended UK equity income product. The open-ended fund has successfully increased its distribution every year for the past 30 years.

Whilst there is significant overlap between BRIG and its better-known open-ended counterpart, the managers of BRIG, Adam Avigdori and David Goldman, are keen to take advantage of the trust structure for this product.

BRIG seeks to balance income generation with growing distributions, by concentrating primarily on identifying attractive opportunities from bottom-up stock analysis. The managers tend to place stocks into one of three ‘buckets’, as we discuss under Portfolio. The trust structure, and this approach, allows them to invest in lower yielding names – which they believe to have significant growth or turnaround potential – and focus on generating yield at a portfolio level.

As we discuss under Dividend, the aim of generating a growing level of distribution is also supported by the board, who have looked to accrue additional revenue reserves in benign conditions whilst distributing these reserves in more challenging environments. This strategy has allowed BRIG to consistently grow its dividend, without placing excessive impediments on the managers to focus solely on dividend generation.

The current level of discount (of c. 5.9%, as of 24/07/2020) is wide relative the trust’s recent history, as we discuss in the Discount section.

BRIG’s dividend looks resilient, despite the headwinds to income investing in the UK and globally. This is thanks to a substantial revenue reserve and a board that has said it intends to use this reserve to maintain distribution levels. BRIG has seen its dividend grow steadily and the board has demonstrated a willingness to access revenue reserves in previous instances of shortfalls in income received. This approach should continue to allow the managers flexibility to access the best opportunities from a total return perspective, and it is positive to see them concentrating the portfolio further into their best ideas. While we note the excellent track record of dividend growth recorded by the same management team on the OEIC, we think during this crisis BRIG’s revenue reserves should allow them greater flexibility to input their best ideas whilst retaining the ability to maintain or raise the dividend.

Intervention from the board to try and ensure BRIG trades at close to NAV has been welcome. The strategy should be easily scalable if the board is able to grow the trust through issuance, without impeding the ability of the managers to take positions in less liquid holdings. This ability remains an attraction offered by the trust structure. Short-term fluctuations in line with wider sentiment towards the UK remain likely. But any downside in the wider market could potentially offer opportunities to initiate new positions in relatively illiquid stocks, which would likely suffer disproportionately.