BlackRock Sustainable American Income 22 September 2022
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Having changed its mandate in July 2021, BlackRock Sustainable American Income (BRSA) now operates with explicit ESG criteria. BRSA owns a portfolio which, based on MSCI data, has superior environmental, social and governance characteristics than its reference index the Russell 1000 Value has. Regardless of the change in mandate, the three-strong team of Tony DeSpirito, David Zhao and Lisa Yang continue to follow the same fundamental process, which focusses on identifying high-quality undervalued companies and is based around three broad criteria: value, income and income growth.
Recently, the team have been positioning their portfolio to be prepared for either a future economic uptick or downturn in the US. They believe that while the US is still benefitting from a post-COVID-19 bounce, the impact of rising inflation and interest rates raises the possibility of a recession. To capitalise on this, the team are using a barbell allocation, allocating both to companies with stable earnings and to those which are more cyclical and beneficiaries of rising economic activity.
Given the powerful tailwinds value stocks are currently benefitting from, BRSA has managed to generate substantial outperformance relative to both its peers and wider US equities since the change in mandate. The team have also managed to outperform their reference index, thanks in part to the operational changes brought about by the new mandate, which has turned BRSA into a higher-conviction portfolio. BRSA currently trades on a 7.1% discount, and while the discount has widened over 2022, the trust still trades on a narrower discount than its peers.
BRSA operates with an enhanced dividend policy, with the trust currently yielding 4.0%, close to the 4.6% average for the AIC UK Equity Income sector. The dividend is supported by contributions from capital, with the board having substantial reserves it can draw on which have been increased this year (see the Dividend section).
We believe BRSA’s focus on cheap high-quality stocks could appeal in today’s environment. The US economy, like much of the world’s, is experiencing high inflation, with the Federal Reserve pursuing a policy of monetary tightening. As the team point out, these are proven tailwinds for value investing, and we think if one believes that the current inflationary pressures are likely to continue, then BRSA may continue to offer an attractive investment opportunity. Another attraction is the trust’s current discount, which has widened in the market sell-off despite BRSA having generated positive performance in 2022, and may therefore offer an attractive entry point. Importantly, the team have taken a barbell approach to their portfolio construction, which means that investors do not necessarily need to take a view on the US economy because the BRSA team have already accounted for both major outcomes.
Thanks to the board’s commitment to its current dividend policy, we believe that BRSA may remain an attractive choice for income investors. This is because although the US has not historically been associated with income, thanks to the large degree of share buybacks, BRSA’s yield remains competitive in comparison to major equity income sectors, despite the trust having generated historically higher NAV returns.
We think the trust’s ESG mandate will also continue to act as a positive catalyst for BRSA’s shareholders. While ESG investing seems to be an inevitable trend within the industry, a number of high-profile ‘greenwashing’ scandals have shown the need for clearly defined ESG integration. We therefore believe BRSA is ahead of the curve in having formally adopted its own set of ESG objectives, offering investors an ESG-aligned product in an investment style not typically associated with ESG compliance.
- Strong ESG credentials versus peers and index
- Value stocks have historically outperformed in periods of rising interest rates and inflation
- Offers substantial yield from a market (the USA) which typically yields less
- Dividend policy post-2022 unclear
- Value stocks may underperform during a period of economic downturn and monetary expansion
- Implementation of gearing can enhance losses on the downside