Results analysis: BlackRock North American Income

• Over the year to 31 October 2020, BRNA delivered NAV total returns of -8.9%, roughly in line with the benchmark Russell 1000 Value Index which saw a fall of -7.5%.
• Although the discount widened during the period, as sentiment was hit by the COVID crisis, the trust started the period at a premium and the board issued shares throughout 2020.
• Based on the final number of shares in issue at the year end, the EPS was 6.71p, an increase of 21.3% versus the previous year. Four quarterly interim dividends of 2.00p per share were paid, in line with the previous financial year. The dividend paid represented a yield of 5.5% on the share price at the year end.
• Looking forward the chairman believes that “there is a strong case that value stocks should now be well placed to outperform growth stocks as the economic picture brightens”. The managers are looking to take advantage of this through investing in “well capitalised companies with strong management teams and good cash generation”.

Kepler view

BlackRock North American Income (BRNA) is something of a ‘unique beast’ in the AIC North American sectors. The trust offers a disciplined, dedicated and consistent approach to US value investing, shying away from the high growth opportunities which dominate the majority of other trusts in the sectors. Although this has been an out-of-favour approach, with US large cap technology dominating headlines and market performance over the past decade, the trust has remained a standout performer in the sector. Not only has BRNA delivered the strongest NAV total returns of the high income vehicles in the sector over one, three and five years, the trust also been the third-best performer in the entire sector over five years. Given the dominance of growth stocks in the US, this is a testament to the effectiveness of the strategy and its ability to overcome many of the stylistic headwinds working against it.

Alongside capital appreciation, the trust has continued to deliver high levels of income for investors since the change of policy in 2018 (described in greater detail here). Since the policy was implemented the dividend per share has substantially increased and the most recent full year dividend of 8p represents a yield of 4.7% at the current share price (08 February 2020). Given the US is not somewhere investors typically look to for income, thanks to the dominance of low-yielding technology stocks, BRNA can be seen as a source of alternative income diversifying away from the typical sources which investors in the UK tend to favour; sectors within which we have in previous research highlighted over-concentration on a surprisingly small number of stocks.

2020 was a difficult year for the US, with BRNA unable to avoid the fallout. The managers' stock selection in the electric utilities industry accounted for a large proportion of the relative underperformance, although an overall underweight to the sector proved costly as well. However, the trust has delivered NAV returns of 12.2% since the end of the reporting period to 01 February 2020, and there are a number of catalysts for this to continue in 2021. The first is the possibility of a revival in the fortunes of value stocks. Currently there is a record concentration of market capitalisation in the five largest stocks, including tech names: Apple, Microsoft, Amazon, Alphabet and Facebook. This has distorted the market towards growth, and its fortunes now hinge largely on the performance of these gigantic companies. As previous market cycles have shown, periods of high market cap concentration have often heralded large corrections in the market, for example during the dotcom bubble. However, arguably the most compelling attribute for the case of reversion is the sheer underperformance of the value sector, and the subsequent dislocation of companies which are considered value orientated. Often these periods of extreme valuation dislocation have been short lived, specifically when the forward P/E ratios of the cheapest stocks are more than two standard deviations below the market average, a situation which we are currently experiencing. In fact, 2020 is the most extreme dislocation in early 30 years.

Alongside this, there are a number of short-term tailwinds which could support the trust. The BRNA team believe that the current economic recovery in the U.S. could be faster than the one which followed the global financial crisis, as the upbeat news on the vaccine gives greater confidence that the economic re-start can accelerate further in 2021. When this is coupled with the economic stimulus President Biden has put into place, there is likely to be renewed economic activity and there is a strong case that value stocks should now be well placed to outperform growth stocks as the economic picture brightens. With this in mind, the current discount of 5.9%, versus a peer group weighted average of 1.4%, could be seen as an interesting entry point – particularly given the premium rating at which the trust started the period. In our view this is a trust which offers attractive NAV growth potential and relatively high levels of income ‘paying for the wait’ in the meantime.

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