21 Nov 2018 08:00
BlackRock North American Income Trust: New research
21/11/2018
Highlights:
· A low-turnover trust focused on the 500 largest stocks in the US by market cap
· The trust has a long track record of achieving its dual target, offering capital appreciation and an attractive income
· A disciplined application of value investment principles means that the trust typically has a holding period of three to five years
· The trust's discount has narrowed to around 1.5% from a 7% level in January 2017 - although it has fluctuated considerably since launch
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BlackRock North American Income Trust (BRNA) has a diversified portfolio comprised mainly of US equities, focused on the 500 largest stocks by market cap. The company's objective is to provide an attractive and growing level of income return with capital appreciation over the long term. The managers have a low-turnover approach, and a strong focus on valuation, aiming for well-established cash generative companies with clear revenue streams and the potential for dividend growth.
The board announced plans in December last year to boost the dividend the trust pays by paying a small proportion from capital, and have specified a quarterly dividend of 2p per share for the current financial year. As such the trust currently offers a yield of 4.6%, putting it comfortably ahead of all of its comparable peers in the AIC North America sector on yield terms (excluding the highly idiosyncratic, and therefore probably not comparable, Middlefield Canadian Income trust).
The trust was launched in September 2012 and, because of its focus on quality and valuations, had a rocky start, underperforming the index in 2013 and 2014 as bond proxies and financials raced ahead. Stock selection also played a part. Since then, Tony DeSpirito, David Zhao and Franco Tapia turned the performance around, focusing particularly on formalising the investment process. This has involved increasing the number of staff in the team, as well as developing a new quant screen to ensure opportunities are flagged up more rigorously. The team now consists of 21 investment professionals, with on average over a decade's worth of experience. The trust outperformed the index in 2015 and then kept pace with it in 2016. More latterly, BRNA produced almost double the return in NAV terms of the Russell 1000 Value index in 2017, and has comfortably outperformed the benchmark so far in 2018.
Over the past year the discount has been relatively volatile, ranging between c.-10% and -2.3%. At the time of writing, the discount is -2.5%, with the consistent outperformance since 2015 helping to improve sentiment towards the trust.
BRNA remains relatively small with net assets of £121m but it offers a very high yield, and this may increase its appeal to larger investors who might otherwise consider it too illiquid to be an option, particularly given the board's demonstrable willingness to buy back shares.
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