BlackRock Sustainable American Income 15 December 2021

BlackRock Sustainable American Income Trust (BRSA) provides its investors with a portfolio of value-orientated US equities, with the dual objective of growth in capital and provision of income. BRSA, having altered its investment mandate in July 2021, also incorporates explicit ESG objectives, whereby the team aim to minimise the ESG risks against its benchmark, the Russell 1000 value. As a result, BRSA’s investment process, and its holdings, have evolved over the past months in order to comply with its new requirements.

BRSA ultimately remains a US value strategy though, with its risk/return profile likely to remain broadly in line with its prior approach. The team believe that the incorporation of explicit ESG targets will act as a tailwind for the trust, given its ability to improve return profiles, e.g. through lower cost of capital for companies which score more highly on these considerations. While it is still early days for the new strategy, the adjustments have already shown benefits, with BRSA having outperformed its benchmark and peers over the last five months, though the trust still trades on a 5.6% discount.

BRSA has seen minor adjustments made to its income potential, thanks to the loss of its ability to write call options to enhance its revenue. The team believe that this will have a minimal impact however, believing BRSA will, at a minimum, have a portfolio yield in line with that of its reference index. The loss of the option overlay will potentially enhance its capital return however as will the implementation of 5% neutral level of net gearing and a more concentrated portfolio that now has the ability to invest in mid-caps.

BRSA’s new investment process is, in our belief, a reflection of the world’s ongoing move towards a more sustainable society. In BRSA’s case, we believe it is somewhat ahead of the pack, being an active sustainable strategy within the US income and value space, something which has so far seldom been seen. We believe that BRSA has only become a more attractive investment strategy as a result, thanks to the additional alpha potential that its increased ESG integration will provide. The loss of some ‘deep value’ stocks with poor ESG scores may not materially impact the long-term performance of the trust, as we believe such companies may anyway be unpalatable to many long-term investors due to the increased awareness of their risks.

Regardless of the improvements BRSA’s ESG incorporation will provide, we also believe that value stocks may be primed to do well, thanks to the powerful combination of rising inflation and economic activity. We believe such an environment will be conducive to BRSA’s outperformance, given its lower valuation risks and sensitivity to interest rates. In fact, BRSA’s large weight to financials may be a form of an inflation hedge, as the sector thrives during rising interest rate environments. If BRSA does see a continued improvement in its relative Performance, as we have begun to see over the last five months, then its Discount may provide an attractive entry point.