Results analysis: BlackRock Sustainable American Income

• Over the year to 31/10/2022, BlackRock Sustainable American Income (“BRSA”) returned 7.4% in NAV total return terms and 3.6% in share price total return terms. This compares with a return of 10.7% for BRSA’s benchmark, the Russell 1000 Value Index. For context, the S&P 500 Index declined by 14.6% in US Dollar terms and advanced by 1.7% in Sterling terms, illustrating both the decline of US large cap stocks, and the strength of the US Dollar over the period.
• BRSA adopted a new investment strategy at the end of July 2021, incorporating ESG objectives into its overall investment objective. Since then, BRSA’s NAV has returned 15.0% and the share price 13.1%, compared with a return in the Russell 1000 Value Index of 16.2%.
• Positive contributions to performance came from stock selection and allocation in the communication services sector and also in energy and utilities.
• Negative contributions came from stock selection in the consumer discretionary sector, in financials and healthcare.
• BRSA’s portfolio is defensively positioned in anticipation of a shallow recession in the US during 2023. The biggest overweight, in information technology, is focused on companies with strong free cash flow and earnings growth, many paying dividends.
• BRSA’s shares traded at an average discount of 5.3% over the year. Given the difficult market conditions during 2022, the board took the view that share buy backs were not in shareholders’ interests.
• BRSA’s EPS declined by 5.4% to 3.84p per share. Four quarterly interim dividends of 2.00p per share were paid in April, July, October and January, the same dividend rate as for the previous financial year. BRSA’s board consider it appropriate to continue with the same dividend policy in the new financial year, using a mixture of current revenue and distributable reserves. The distributable reserve amounted to £168.6m at the year, compared to the annual cost of dividends of c. £6.4m.
• Alice Ryder, chair, said: “It has been a difficult decade for the ‘value’ approach to investing but one of the defining characteristics of financial markets in 2022, aside from the volatility, has been the rotation from high growth stocks to ‘value’ areas of the market. Historically, value has tended to do best in periods of higher and rising rates and higher and rising inflation, so this is likely to continue to be supportive of our Portfolio Managers’ value investing approach in the near term."

Kepler View

BlackRock Sustainable American Income (BRSA) put in a positive absolute performance against a backdrop of declines for many major market indices, and as the figures for the S&P 500 illustrate, Sterling-based investors into US equities were generally rescued by the strength of the US Dollar. Although BRSA’s adoption of ESG objectives is an important step in its evolution, the management team’s value-orientated investment style remains constant. As BRSA’s chair notes, the last decade hasn’t been an easy one for value investors, but there are strong signals that this could be changing. Rising interest rates, inflation and economic growth slowing into a recession could mark a turning point in the overall investment landscape that could be very constructive for the team’s value discipline.

On the subject of ESG, BRSA conforms to Article 8 and ESG forms part of its overall objective. Although certain sectors, such as defence and tobacco, are excluded, BRSA’s approach is really more about engagement, and it looks to invest in what it deems as ESG leaders and improvers. Having the flexibility to invest in the energy sector helped with performance last year, with exposure to companies such as Shell, which the team sees as a leader in energy transition, providing positive contributions. We think that an investment manager with the scale of BlackRock can credibly claim that its engagement with companies will be taken seriously, as it has significant weight of capital behind its opinions.

We think combining a value style with ESG objectives means that BRSA also acts a good diversifier, and it tends to favour a different set of stocks and sectors from both the index and more growth-orientated strategies. While BRSA underperformed its value style benchmark by a small amount last year, it proved relatively resilient when compared to funds and trusts with a strong growth bias. Combine this with its payment of a dividend of 8p per share, equivalent to a yield of 4% at the current share price, and BRSA makes for an effective diversifier in any US equity fund portfolio.

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