BlackRock Income & Growth 07 January 2021
Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by BlackRock Income & Growth. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
BlackRock Income & Growth (BRIG) targets growth in both income and capital over the long term. BRIG has been run by the well-resourced UK Income team at BlackRock since 2012.
Whilst there is significant overlap between BRIG and its better-known open-ended counterpart, the managers Adam Avigdori and David Goldman are keen to use the advantages of the closed-end structure for the trust. This includes the ability to incorporate smaller less liquid companies, and a lesser requirement to consider short-term underlying income generation.
As discussed under Portfolio, the managers tend to place stocks into one of three ‘buckets’. 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 primarily on generating income growth rather than a high yield. The managers report that they see significant opportunities in the UK market currently.
BRIG has a historic yield of c. 3.8% (as at 25/11/2020). The board has remained supportive of growing the trust’s dividend, which has risen every financial year since 2012. As discussed under Dividend, the board has historically looked to accrue additional revenue reserves in benign conditions whilst distributing these reserves in more challenging environments. As a result, BRIG has strong revenue reserves which could be deployed to help support dividends in the current challenging backdrop. The managers note that their underlying dividend generation has been substantially more resilient than the market.
As discussed under Gearing and Performance, the managers tactically reduced gearing and derisked BRIG at the start of 2020 over concerns about market sentiment. They have subsequently started to increase gearing again. The Discount has again widened in recent weeks to levels wide relative to its own history (c. 8.3% as at 18/12/2020).
BRIG currently holds substantial revenue reserves. The COVID-19 pandemic and the lockdowns that followed have clearly proven a substantial challenge to dividend generation globally, as a vast swathe of companies found their operations either impeded or forced to stop entirely. Secondary impacts to resources demand (energy) and interest rates (banks and insurers) further affected many significant contributors to UK dividends. Whilst there are signs that impairments may not be as substantial or permanent as first feared, the revenue reserves BRIG boasts and previous willingness of the board to deploy them lend support to the appeal of this trust as a source of income for investors. The managers’ comments on the relative resilience of BRIG’s underlying revenue generation over this period offer further comfort.
With a reserve buffer and the support of the board, BRIG’s managers have retained flexibility to access the best opportunities from a total return perspective. Given the recent bifurcation in UK equity markets, and the significant valuation opportunity which seemingly exists in the UK market writ-large compared to global peers, greater flexibility to invest where the managers identify the best opportunities could be more important than ever in the coming months. Short-term fluctuations in line with wider sentiment towards the UK remain likely, and could especially have a follow-through to discount volatility. However, the managers retain further gearing capacity to take advantage of any market falls.
|Reasonable yield which is very well supported by revenue reserves
|Likely to trail in rally led by cyclicals
|Closed-ended structure allows access to attractive mid and small cap opportunities without impinging on overall portfolio liquidity
|Gearing can amplify downside as well as magnify upside
|Discount is currently wide relative to trust’s history
|Small size of trust may make harder to build a position for institutional investors