North American Regulatory News (NAIT)

THE NORTH AMERICAN INCOME TRUST PLC

ANNUAL FINANCIAL REPORT ANNOUNCEMENT FOR THE YEAR ENDED31 JANUARY 2023

Investment Objective

To provide investors with above average dividend income and long-term capital growth through active management of a portfolio consisting predominately of S&P 500 US equities. 

Financial Results and Performance

Performance Highlights

Financial Calendar, Dividends and Highlights

Dividends

Highlights

Strategic Report

Chair's Statement

Market Review

North American equity market indices fell significantly over the year ended 31 January 2023. A combination of higher interest rates and surging inflation caused North American share prices to fall sharply from early 2022 onwards. Overall, however, North American equities ended higher in sterling terms on a total return basis as the US dollar strengthened against the pound. Please refer to your Manager's Review on pages 22 to 24 of the 2023 Annual Report for an in-depth review of the market.

Performance

Over the year ended 31 January 2023, the Company's net asset value ("NAV") total return per share was 9.6% outperforming the 8.5% total return in sterling terms for the Russell 1000 Value Index, the Company's primary reference index, while the share price total return was 12.4%. The discount at which the share price traded relative to the NAV narrowed over the year from 11.2% to 9.3%. While it is pleasing to report outperformance, it is important to note that most of the absolute increase in the value of the portfolio can be ascribed to the strengthening of the US dollar by 12.2% year over year, which boosted the valuations on the balance sheet in sterling terms. By way of illustration, the Russell 1000 Value Index delivered a total return in US dollar terms of -0.4%.

The outperformance was attributable mainly to stock selection in the materials and real estate sectors although allocation was a small negative in the latter. The Company's performance relative to the reference index was hampered by stock selection in the consumer discretionary and energy sectors although allocation within those segments partially offset the negative impact.

A more detailed review of portfolio activity and performance can be found in the Manager's Review on pages 22 to 24 of the 2023 Annual Report.

Revenue Account

Total revenue from portfolio's equity holdings over the period under review was £17.8 million (2022 - £15.0 million). This was against a background which saw most of the Company's equity holdings continue their established record of dividend growth and the US dollar strengthen from a weighted average of $1.37 to the pound in 2022 to a weighted average of $1.22 to the pound in the current year. During the year ended 31 January 2023, the Company received premiums totalling £4.2 million (2022 - £3.9 million) in exchange for entering into stock option transactions. This option income, the generation of which remains consistent with the Manager's company-focused investment process, represented 18.1% of total income (2022 - 19.8%). As the Company's exposure to corporate bonds has decreased over recent years, interest income from bonds was 0.5% of total income (2022 - 0.6%). Bond coupons and option premiums will remain secondary sources of income in the belief that dividends must remain the overwhelming source of income available for distribution. The resulting revenue return per Ordinary share rose by 18.8% to 12.2 pence per share for the year ended 31 January 2023 compared to 10.3 pence per share for the year ended 31 January 2022. This comprised an increase in the dividend income of 17.6% in sterling terms and an increase in option income of over 7.6%. Further details of the portfolio are shown on pages 31 to 32 of the 2023 Annual Report.

Dividend

In light of the above, the Board has declared a final dividend of 3.5 pence per share, resulting in total dividends for the year ended 31 January 2023 of 11.0 pence per share (2022 - 10.3p) - a 6.8% increase. The proposed final dividend is payable on 12 June 2023 to shareholders on the register on 5 May 2023 (ex-dividend date: 4 May 2023).

In reaching its decision, the Board balanced the wish to increase the amount distributed to shareholders with the recognition that most of the increase in revenue was due to the US dollar strengthening against the sterling during the year, a situation which could reverse at any time, with maintaining revenue reserves at the equivalent of one full year's dividend payout. 

The Board remains committed to its progressive dividend policy and extending its track record of twelve consecutive years of dividend growth. To that end, the Board intends, in the absence of any unforeseen developments, to pay three quarterly dividends of 2.6 pence per share for the financial year ending 31 January 2024, with the fourth interim dividend being determined once the full-year results are known.

During the year the Board reviewed the schedule of dividend payments and has decided to put a resolution to the shareholders for them to approve the dividend policy in future, rather than approving the final dividend. The effect of this will be to allow the Board to accelerate the payment of the final distribution for the year and to make the quarterly payments more evenly spaced over the year, for the benefit of shareholders. If approved, the changes, illustrated by way of example in the table on page 9 of the 2023 Annual Report, will take effect for the year ending 31 January 2024.

* indicative date only

Management of Premium and Discount

The Company's share price rose by 8.1% to 306.0 pence per share and ended the year at a 9.3% discount to total NAV, compared with a 11.2% discount at the end of the 2022 financial year. The Board continues to work with the Manager in both promoting the Company's benefits to a wider audience and providing liquidity to the market through the use of share buybacks. Over the course of the year, the Company's shares mainly traded at discounts ranging between 6.0% and 10.0%.

During the year, 441,185 shares were bought back and cancelled at a weighted average price of 281.90p and a weighted average discount of 11.7%. The total cost was £1.3 million. The Company has not bought back any additional Ordinary shares since 31 January 2023.

Gearing

The Board believes that sensible use of gearing should enhance returns to our shareholders over the longer term. In December 2020, the Company entered into a long-term financing agreement for US$50 million with MetLife comprising two loans of US$25 million with terms of ten and 15 years. As a result, net gearing at 31 January 2023 stood at 2.9% (2022: 4.9%).

Promotional Activity

The Board continues to promote the Company through the Manager's investment trust share plan, which provides a series of savings schemes through which savers can invest in the Company in a low-cost and convenient manner (see page 95 of the 2023 Annual Report).

During the last year we have worked with our Manager to refine our messaging and provide clarity to shareholders around our investment objectives. This includes introducing a new descriptor line as seen on the front cover of this report: Seeking resilient growth and rising income from North American equities.

Through our marketing efforts we aim to keep all shareholders informed and updated on their investments, particularly during periods of volatility. Updates include commentary, articles and videos allowing investors to hear directly from the Investment Manager on a regular basis - to understand both the outlook and the decisions being made within the portfolio itself. All of this communication can be found on the Company's website northamericanincome.co.uk and helps to inform shareholders' investment decisions to ensure they remain aligned with their individual needs.

You can also follow 'abrdn Investment Trusts' on LinkedIn and Twitter or register for email updates here: northamericanincome.co.uk/signup

Board Activity

In April 2022, for the first time since 2019 due to the travel restrictions that the pandemic had placed upon us, the Board was pleased to travel to North America and meet with the Investment Manager and local experts face-to-face. The benefit of these meetings is evident in the engagement that follows. Since then, the Board has focused in particular on matters of sustainability and how they are perceived and approached by North American companies, as well as the economic pressures in the US, as distinct from those in the UK. We continue to monitor developments in these areas with interest. More information on the Manager's approach to ESG integration in its investment process can be found on pages 25 to 27 of the 2023 Annual Report.

On 1 July 2022 Patrick Edwardson was appointed as an independent Non-Executive Director of the Company. Patrick has a wealth of investment management experience, including managing the Scottish American Investment Company plc for ten years, having worked for Baillie Gifford for 27 years. The Board is already benefitting from Patrick's experience. He will stand for election as a Director for the first time at the Company's Annual General Meeting ("AGM") in June 2023.

Also, during the year, after my first AGM as Chair of the Company, I took the opportunity to meet with investors in the UK, on behalf of the Board, to gain a deeper understanding of their interests in the Company and address questions on a more informal basis. As usual, we encourage all shareholders to contact the Board with any queries using contact details on page 109 of the 2023 Annual Report.

Towards the end of the year, the Board undertook its board evaluation. Whilst the Board does not consider it appropriate to utilise an external agent for this, due to the current size and composition of the Board, the Board does take a more thorough approach to its evaluation every other year. The results of the board evaluation are outlined in the Statement of Corporate Governance on pages 44 to 46 of the 2023 Annual Report.

Outlook

The Federal Reserve (the "Fed") accompanied its rate hike at the start of December 2022 with a slightly less hawkish message around future policy, a near-term positive for equity markets. Indeed, a majority of policymakers are now forecasting an easing in the pace of future rate hikes. Also, following major central banks' rapid monetary tightening to combat high inflation, certain banks' balance sheets came under severe pressure in March 2023 as the value of their fixed income portfolios fell and customers withdrew deposits. Technology-focused Silicon Valley Bank (SVB), as well as cryptocurrency-industry lenders Signature Bank and Silvergate Capital, collapsed. SVB's demise was the largest banking failure since the Global Financial Crisis of 2007-2008. A consortium of US banks also injected $30 billion into regional lender First Republic Bank. In Europe, UBS mounted a $3.3 billion government-backed takeover of Credit Suisse after the latter ran into financial difficulties. These events, which led to major central banks boosting dollar liquidity to ease strains in funding markets, have caused fears of a global banking crisis and deep recession.

While, as a result, investors have lowered their expectations of further monetary tightening, the Federal Open Market Committee remains determined to tame inflation, even if this comes at the cost of a recession. The continued strength of employment suggests that wage growth will continue to run at rates well in excess of those consistent with the Fed's inflation target. The strength of wage growth has clearly contributed to surging services inflation, alongside very aggressive increases in rent measures and rebounding services demand as Covid-19 headwinds fade and in March 2023, the Fed increased rates again by 25bps as inflation hit 6% year-on-year in February. Your Manager's view is that this will lead to further tightening by the Fed over the coming months as policy remains restrictive, adding to its conviction that the economy will enter a downturn in the middle of this year.

So, what does this mean for equity markets going forward? Despite the recent rise in markets, sentiment has remained under pressure due to the ongoing banking crisis, hawkish Federal Reserve comments and further negative macroeconomic readings, with equity levels still materially lower than their recent peak. The economic outlook, both in the US and abroad, remains challenging and earnings downgrades have continued to come through since the end of the third-quarter earnings season. Nonetheless, US equity levels now appear to have priced in a strong probability of slowing economic growth and that inflation has peaked. On that basis, your Manager is now seeing some target companies trading on attractive multiples and increasingly appealing valuation points for long-term investors, such as ourselves, and has, therefore, become cautiously optimistic on the outlook for US equities in particular as an asset class.

Annual General Meeting ("AGM") and Online Shareholder Presentation

AGM

The AGM is scheduled to be held at 2:00 pm on 8 June 2023 at the offices of abrdn at 1 George Street, Edinburgh, EH2 2LL. We encourage all shareholders to complete and return the form of proxy enclosed with the Annual Report to ensure that your votes are represented at the meeting (whether or not you intend to attend in person). If you hold your shares in the Company via a share plan or a platform and would like to attend and/or vote at the AGM, then you will need to make arrangements with the administrator of your share plan or platform. For this purpose, investors who hold their shares in the Company via the abrdn Investment Plan for Children, Share Plan or ISA will find a Letter of Direction enclosed. abrdn Planholders are encouraged to complete and return the Letter of Direction in accordance with the instructions.

The Notice of Meeting can be found on pages 102 to 106 of the 2023 Annual Report.

Online Shareholder Presentation

In order to encourage as much interaction as possible with our shareholders, there will also be an online shareholder presentation at 2:30 pm on 22 May 2023. At this event, you will receive a presentation from the Investment Manager and have the opportunity to ask questions of the Chair and the Investment Manager. The online presentation is being held ahead of the AGM to allow shareholders to submit their proxy votes prior to the meeting.

Full details on how to register for this event will be available on the Company's website. Shareholders are also encouraged to submit questions in advance of the online shareholder presentation and the AGM at the following email address: northamericanincome@abrdn.com.

If you are unable to attend the online event, the Investment Manager's presentation will be available on the Company's website shortly after the presentation.

As usual, the Board strongly encourages all shareholders to exercise their votes in respect of the AGM in advance of the meeting, and to appoint the Chair of the meeting as their proxy, by completing the enclosed Form of Proxy (or Letter of Direction for those who hold shares through the abrdn savings plans).

Dame Susan RiceChair4 April 2023

Overview of Strategy

Introduction

The Company is an investment trust and its Ordinary shares are listed on the premium segment of the London Stock Exchange. The Company aims to attract long-term private and institutional investors wanting to benefit from the income and growth prospects of North American companies. The Board does not envisage any change in the Company's activity in the foreseeable future. 

Investment Objective and Purpose

To provide investors with above average dividend income and long-term capital growth through active management of a portfolio consisting predominately of S&P 500 US equities.

Reference Index

The Board reviews performance against relevant indices, including the Russell 1000 Value Index (in sterling terms) and the S&P 500 Index (in sterling terms) as well as peer group comparisons. The aim is to provide investors with above average dividend income from predominantly US equities which means that investment performance can diverge, possibly quite materially in either direction, from these indices.

Investment Policy

The Company invests in a portfolio predominantly comprised of S&P 500 constituents. The Company may also invest in Canadian stocks and US mid and small capitalisation companies to provide for diversified sources of income. The Company may invest up to 20% of its gross assets in fixed income investments, which may include non-investment grade debt. The Company's investment policy is flexible, enabling it to invest in all types of securities, including (but not limited to) equities, preference shares, debt, convertible securities, warrants, depositary receipts and other equity-related securities.

The maximum single investment will not exceed 10% of gross assets at the time of investment and it is expected that the portfolio will contain around 50 holdings (including fixed income investments), with an absolute minimum of 35 holdings. The composition of the Company's portfolio is not restricted by minimum or maximum market capitalisation, sector or country weightings.

The Company may borrow up to an amount equal to 20% of its net assets.

Subject to the prior approval of the Board, the Company may also use derivative instruments for efficient portfolio management, hedging and investment purposes. The Company's aggregate exposure to such instruments for investment purposes (excluding collateral held in respect of any such derivatives) will not exceed 20% of the Company's net assets at the time of the relevant acquisition, trade or borrowing.

The Company does not generally hedge its exposure to foreign currency. The Company will not acquire securities that are unlisted or unquoted at the time of investment (with the exception of securities which are about to be listed or traded on a stock exchange). However, the Company may continue to hold securities that cease to be listed or quoted, if appropriate.

The Company may participate in the underwriting or sub-underwriting of investments where appropriate to do so.

The Company may invest in open-ended collective investment schemes and closed-ended funds that invest in the North American region. However, the Company will not invest more than 10%, in aggregate, of the value of its gross assets in other listed investment companies (including listed investment trusts), provided that this restriction does not apply to investments in any such investment companies which themselves have stated investment policies to invest no more than 15% of their gross assets in other listed investment companies.

The Company will normally be substantially fully invested in accordance with its investment objective but, during periods in which changes in economic conditions or other factors so warrant, the Company may reduce its exposure to securities and increase its position in cash and money market instruments.

Management

The Board has appointed abrdn Fund Managers Limited ("aFML") to act as the alternative investment fund manager ("AIFM" or the "Manager").

The Directors are responsible for determining the investment policy and the investment objective of the Company. The Company's portfolio is managed on a day-to-day basis by abrdn Inc. (the "Investment Manager") by way of a delegation agreement in place between aFML and abrdn Inc.

The Investment Manager invests in a range of North American companies, following a bottom-up investment process based on a disciplined evaluation of companies through direct visits by its fund managers. Stock selection is the major source of added value, concentrating on quality first, then price. Top-down investment factors are secondary in the Investment Manager's portfolio construction, with diversification rather than formal controls guiding stock and sector weights.

Key Performance Indicators ("KPIs")

The Board uses a number of financial performance measures to assess the Company's success in achieving its objective and determining the progress of the Company in pursuing its investment policy. The main KPIs identified by the Board in relation to the Company which are considered at each Board meeting are as follows:

A Considered to be an Alternative Performance Measure. See below for more information.

Principal Risks and Uncertainties

There are a number of risks which, if realised, could have a material adverse effect on the Company and its business model, financial position, performance and prospects. The Board has in place a robust process to identify, assess and monitor the principal risks and uncertainties facing the Company and to identify and evaluate newly emerging risks, such as climate change and geopolitical developments. This process is supported by a risk matrix which identifies the key risks for the Company, including emerging risks, and covers strategy, investment management, operations, shareholders, regulatory and financial obligations and third party service providers. This risk matrix is reviewed on a regular basis. A summary of the principal risks and uncertainties facing the Company, which have been identified by the Board, is set out in the following table, together with a description of the mitigating actions it has taken.

The principal risks associated with an investment in the Company's shares are published monthly in the Company's factsheet or they can be found in the pre-investment disclosure document ("PIDD") published by the Manager, both of which are on the Company's website.

In addition to these risks, the Company is exposed to the impact of continued geopolitical tensions or changes, including recent banking failures, which could have an adverse impact on stockmarkets and the Company's portfolio.

In all other respects, the Company's principal risks and uncertainties have not changed materially since the year end.

Promoting the Success of the Company

The Board is required to report on how it has discharged its duties and responsibilities under section 172 of the Companies Act 2006 (the "s172 Statement"). Under section 172, the Directors have a duty to promote the success of the Company for the benefit of its members as a whole, taking into account the likely long-term consequences of decisions, the need to foster relationships with the Company's stakeholders and the impact of the Company's operations on the environment.

The Board comprises five Directors at the time of writing this report and the Company has no employees or customers in the traditional sense. As the Company has no employees, the culture of the Company is embodied in the Board of Directors. The Board seeks to promote a culture of strong governance and to challenge, in a constructive and respectful way, the Company's advisers and other stakeholders.

The Board's principal concern has been, and continues to be, the interests of the Company's shareholders and potential investors. The Manager undertakes an annual programme of meetings with the largest shareholders and investors and reports back to the Board on issues raised at these meetings. The Investment Manager, who is based in the Manager's Philadelphia office, will attend such meetings.

The Board encourages all shareholders to attend and participate in the Company's and can contact the Directors via the Company Secretary. Shareholders and investors can obtain up-to-date information on the Company through its website and the Manager's information services and have direct access to the Company through the Manager's customer services team or the Company Secretary. The Chairman also held a live webinar ahead of the 2022 AGM, taking questions with the Investment Manager. This was made available on the Company's website for shareholders. 

As an investment trust, a number of the Company's functions are outsourced to third parties. The key outsourced function is the provision of investment management services to the Manager and other stakeholders support the Company by providing secretarial, administration, depositary, custodial, banking and audit services.

The Board undertakes a robust evaluation of the Manager, including investment performance and responsible ownership, to ensure that the Company's objective of providing sustainable income and capital growth for its investors is met. The Board typically visits the Manager's offices in the US on a periodic basis and last visited the Manager in April 2022. This enables the Board to conduct face to face review meetings with the fund management and research teams. The portfolio activities undertaken by the Investment Manager on behalf of the Company can be found on page 22 to 24 of the 2023 Annual Report and details of the Board's relationship with the Manager and other third party providers, including oversight, is provided in the Statement of Corporate Governance on page 42 of the 2023 Annual Report. 

Key decisions and actions during the year ended 31 January 2023, which required the Directors to have greater focus on stakeholders included:

Directorate

The Board is mindful of the importance of having a well- considered and orderly succession plan for continuity of performance and delivery of the Company's strategy. The search process for a new director was concluded in the first half of 2022, resulting in the appointment of Patrick Edwardson in July 2022. The Board believes that its composition is well placed to promote the success of the Company and to oversee the Manager's activities.

Marketing Strategy

With the Board Changes last year, the Board considered it an opportune time to engage with investors directly. This included direct meetings with the Chair and the Company's first webinar in May 2022, where shareholders had a chance to ask questions prior to exercising their proxy votes for the 2022 AGM. 

In addition, the Board worked with the Manager to refine the Company's corporate narrative to provide clarity to shareholders around the Company's investment objectives. 

Dividends paid to shareholders

During the year, the Board reviewed the dividend payment policy. It concluded that it would propose a revised dividend calendar, with quarterly interim dividend payment dates spread more evenly throughout the year, instead of three interim dividends and a final dividend. Subject to shareholder approval of the proposed dividend policy, four interim dividends will be proposed for the financial year ending 31 January 2024 (see page 9 of the 2023 Annual Report for more details). The Board recognises the importance of dividends to shareholders and the importance of receiving a regular income.

Management of the portfolio

As in previous years, the Board focused on the performance of the Manager in achieving the Company's investment objective within an appropriate risk framework.

As explained in more detail on page 46 of the 2023 Annual Report, during the year, the Management Engagement Committee decided that the continuing appointment of the Manager was in the best interests of shareholders.

Duration

The Company does not have a fixed winding-up date; however, shareholders are given the opportunity to vote on the continuation of the Company every three years at the AGM. The Company's continuation vote held in 2021 was supported by shareholders and the next continuation vote is scheduled at the AGM in 2024.

Board Diversity

The Board recognises the importance of having a range of skilled, experienced individuals with the appropriate knowledge in order to allow the Board to fulfil its obligations. At 31 January 2023 the Board comprised two men and three women with diverse and relevant expertise and perspectives.

Environmental, Social and Human Rights Issues

The Company has no employees as the Board has delegated day to day management and administrative functions to aFML. There are therefore no disclosures to be made in respect of employees. Further information on socially responsible investment can be found on pages 25 to 27 of the 2023 Annual Report.

Global Greenhouse Gas Emissions and Streamlined Energy and Carbon Reporting ("SECR")

All of the Company's activities are outsourced to third parties. The Company therefore has no greenhouse gas emissions to report from the operations of its business other than directors' travel, nor does it have responsibility for any other emissions producing sources under the Companies Act 2006 (Strategic Report and Directors' Reports) Regulations 2013. For the same reasons as set out above, the Company considers itself to be a low energy user under the SECR regulations and therefore is not required to disclose energy and carbon information.

The Investment Manager has access to a range of ESG tools, two of which are climate-related. These tools allow the Company's Investment Manager to look at the overall carbon footprint of their portfolios and compare with the reference index. It also allows them to identify the highest carbon emissions stocks across portfolios. Furthermore, the carbon footprint tool has been used to help further guide the Investment Manager's engagement with companies (for example, including the top three carbon-emitting stocks in the priority engagement process).

Viability Statement

The Company does not have a formal fixed period strategic plan but the Board does formally consider risks and strategy on at least an annual basis. The Board considers the Company to be a long-term investment vehicle but for the purposes of this Viability Statement has decided that a period of three years is an appropriate period over which to report. The Board considers that this period reflects a balance between looking out over a long-term horizon and the inherent uncertainties of looking out further than three years.

In assessing the viability of the Company over the review period the Directors have focused upon the following factors:

- The ongoing relevance of the Company's investment objective in the current environment and recent feedback from the Company's brokers and shareholders, where available.

- A resolution for the continuation of the Company was passed at the AGM in June 2021 showing ongoing support from shareholders for the Company's mandate.

- The principal risks detailed in the strategic report on pages 13 to 16 of the 2023 Annual Report and the steps taken to mitigate these risks. In particular, the Board has considered the operational ability of the Company to continue in the current environment, including the impact of geopolitical developments, and the ability of the key third party suppliers to continue to provide essential services to the Company. Third party services have continued to be provided effectively.

- The Company is invested in readily realisable listed securities. Recent stress testing has confirmed that shares can be easily liquidated, despite the more uncertain and volatile economic environment.

- The level of revenue surplus generated by the Company and its ability to achieve the dividend policy. The Company has continued to deliver dividend growth whilst building up revenue reserves (see pages 2 and 4 of the 2023 Annual Report) which can be used to top up the dividend in tougher times.

- The level of gearing is closely monitored by the Board and the Manager. Covenants are actively reviewed and there is adequate headroom in place.

- The availability of long-term gearing facilities. The Company's gearing comprises $25 million of ten year loan notes (until December 2030) and $25 million of 15 year loan notes (until December 2035). 

Accordingly, taking into account the Company's current position and the potential impact of its principal risks and uncertainties, the Board has a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due for a period of three years from the date of this Report. In making this assessment, the Board has considered that matters such as significant economic or stockmarket volatility, a substantial reduction in the liquidity of the portfolio, or changes in investor sentiment could have an impact on its assessment of the Company's prospects and viability in the future.

Dame Susan RiceChair4 April 2023

Results

Performance (total return)

Ten Year Financial Record

Investment Manager's Review

Market review

North American equity market indices were volatile over the year ended 31 January 2023, however, ended higher in sterling terms on a total return basis as the US dollar strengthened against the pound, from a weighted average of $1.37 to the pound in 2022 to a weighted average of $1.22 to the pound in the current year. This inflated the valuations on the balance sheet in sterling terms.

A combination of higher interest rates and surging inflation - due in part to a booming jobs market - caused North American share prices to fall sharply from early 2022 onwards. Growth-focused stocks, such as technology companies, which had been among the strongest stock market performers in the years leading up to 2022, were particularly hard hit. These stocks are more sensitive to higher interest rates. As US inflation hit a 40-year high, the Federal Reserve ("Fed") became increasingly aggressive in its response. It raised its main interest rate by 0.25% in March 2022, 0.50% in May 2022 and by 0.75% at each of its next four meetings. Signs of progress in the battle against inflation emerged in November 2022 when the annual consumer inflation figure (for the twelve months to October) showed an unexpected drop to 7.7%. Further falls in the annual consumer inflation rate increased investor confidence that price pressures in the US were subsiding. Accordingly, the Fed increased its main interest rate by a more measured 0.50% in December, down from the 0.75% rate hikes of previous months.

The energy, materials and healthcare sectors were the strongest performers within the Russell 1000 Value index, the Company's primary reference index, while the information technology, communication services and real estate sectors were the primary market laggards for the period.

Performance

The Company returned 9.60% on a NAV basis in sterling terms for the year ended 31 January 2023, outperforming the 8.51% return of its primary reference index, the Russell 1000 Value Index (total return) in sterling terms. The revenue account remained in good shape, building upon the record established in prior years.

At a sector level, the largest contributor to the Company's performance was information technology due to stock selection and, to a lesser extent, having an underweight exposure. The second-largest contributor was real estate, thanks to stock selection, which was partially offset by a small negative effect from being overweight in the sector.

Looking at individual stock contributors to performance included real estate investment trust Gaming & Leisure Properties, its shares rerating higher after the company made some acquisitions of regional casinos. Pharmaceutical company Bristol-Myers Squibb was also a positive. Cash flows remained strong and there were some signs of early successes in the company's drugs pipeline. The pharmaceutical sector, where Bristol-Myers Squibb is our largest position, was rerated over the period. Oil refiner, Phillips 66, was also a positive for the Company. The diversified energy company benefited from extremely strong refining margins following Russia's invasion of Ukraine. Also, Phillips 66 completed two acquisitions that increased the company's exposure to a more stable part of the energy value chain while also growing the earnings power of the company.

On the negative side, the main detractor from the Company's performance at a sector level was consumer discretionary, due to stock selection and, to a lesser extent, having an overweight exposure. The second-largest detractor was energy, with weaker stock selection that was partially offset by a positive effect from being overweight to the sector.

The largest individual stock detractors from performance were clothing companies HanesBrands and VF Corporation. Shares in HanesBrands were weak due to a delay in the company's new management implementing changes during a period when excessive apparel inventories pressurised all stocks in the industry. Meanwhile, VF Corporation suffered from a continued lack of traction and a subsequent change of management at its important Vans brand. Also, China's strict 'zero-Covid' policy adversely affected both demand for VF Corporation's products and the company's supply chain.

Canadian financial services company CI Financial was also a detractor over the period. Its shares de-rated as investors were worried about the company's increased leverage after its acquisition of several high-quality registered investment advisors.

Portfolio activity

The investments in the Company's portfolio remained consistent with our investment process which aims to identify high-quality, cash generative companies. During the year, market volatility created opportunities to add quality companies into the portfolio at compelling prices. The changes in the portfolio are summarised below.

We re-initiated a position in Home Depot as a best-in-class retailer, led by a high-quality management team. At the time that we re-initiated, the shares were caught in a collective market drawdown that meaningfully detached Home Depot's shares from their intrinsic value. The company has a strong real estate position from a location standpoint, best-in-class execution and a culture that has led to far superior sales per square foot metrics than its closest peer. Home Depot operates in a near duopoly with rational pricing.

We believe that CVS Health ("CVS") is making significant improvements to the quality of the business, pivoting it towards more attractive, structurally growing areas of healthcare. The key strategic initiative is to lower the retail pharmacy footprint and invest in primary care delivery. In the latter area, there is a significant opportunity for growth as 30% of Americans do not have a primary care provider and the industry is moving towards value-based care, which offers more attractive returns. CVS can build on the existing range of basic services offered at its HealthHUBs and MinuteClinics to bring a more affordable model of care delivery.

We believe PNC Financial Services ("PNC") can continue to take deposit and loan market share over time as the bank's scale gives it capacity to invest in technology as banking moves further into the digital world. In addition, we think there is a long runway for growth from PNC's BBVA acquisition that will create additional upside. PNC historically has a good underwriting track record and we believe it will hold up well relative to peers in a tough market environment.

We initiated a position in Merck, with the view that its modest valuation captures concerns on both the potential to overpay for large scale M&A as well as the concentration in Keytruda, which will lose patent protection in 2028. We believe that Merck has other growth drivers that will help offset this view. For example, Gardasil's capacity expansion, beginning in 2023, will help as will additional M&A that capitalises on opportunities like the Acceleron deal. Further information on the company can be found in the case study on page 35 of the 2023 Annual Report.

We sold the position in Nutrien after a rally in fertiliser prices drove the company's earnings to unsustainably high levels. We expect earnings to revert lower over time, along with the stock price.

We disposed of the holding in Class I railroad operator Union Pacific given multiple quarters of mixed performance. The company has faced operational challenges, combined with a high relative valuation that embeds faster growth over the next year than we believe is attainable. Union Pacific remains a high-quality operator, but, at current valuations, better opportunities can be found elsewhere within cyclicals.

We sold out of the holding in Genuine Parts Company, a high-quality distributor that focuses on two distinct segments - the automotive aftermarket parts and a broad industrial offering. The company's valuation expanded from a market multiple to a 30-40% premium on peak earnings.

We sold the position in Huntington Bancshares on fears that consensus expense expectations for 2023 were too low and needed to be adjusted upwards.

We disposed of the holding in Gilead Sciences on the view that the company's recent acquisitions will not provide quite the level of commercial upside that was originally hoped for. Therefore, upside is dependent on success in some clinical trials, where the outlook is more limited. While Gilead continues to execute reasonably well on its base business, this appears to be fairly well captured by the stock's current valuation. Gilead remains a solid, quality company, but M&A deals that were needed to rejuvenate interest in the stock may struggle to generate attractive returns.

We sold the position in HanesBrands due to management's inability to improve the company's weakened operations given the demand drop that affected cash flows. While the company's turnaround plan to reduce complexity, focus on the most profitable products and grow the Champion brand had strong merits, the unwinding of demand tailwinds from the pandemic has proved to be too strong. We sold the holding, as the timing of any recovery did not justify the embedded risk of retaining a position.

We sold the position in utility CMS Energy early in the period on valuation concerns but bought it back later on, as a pullback in the company's shares gave us the opportunity to re-establish a holding in a company that we regard as a best-in-class operator in its sector.

Dividend growth

The Company's strong track record of dividend growth continued over the review period. A number of holdings grew their dividends above our long-term average, with several announcing increases in the double digits.

The highest increase was PNC Financial Services Group, which increased its dividend by 20%. Other notable increases came from home-improvement retailer Home Depot, which increased its dividend by 15%; oil refiner Philips 66, with a 12% increase; Broadcom, a provider of semiconductor and infrastructure software services, which increased the payout by 12% and telecommunications equipment firm Cogent Communications, which raised its dividend by 11%.

Three other companies that increased dividends by 10% were CVS Health, the owner of several healthcare brands, Analog Devices, the semiconductor manufacturer, and Royal Bank of Canada. 

Additionally, one holding announced special payments to shareholders during the review period. Derivatives exchange operator CME Group declared an annual variable dividend of US$4.50 per share in December 2022. The company uses this approach to facilitate paying out all cash that it generates over the year beyond a minimum threshold. This compares favourably to the prior year variable dividend of $3.3.

Outlook

With major central banks, led by the Fed, continuing to tighten monetary policy in an effort to control inflation, the risk of an economic slowdown remains. However, the likelihood of a US recession seems to have fallen lately, helped by a relatively robust labour market. Although corporate earnings are still being revised down, we see some interesting investment opportunities at current levels and, as a result, have become more constructive on equities as an asset class. We continue to see improvement in supply chains globally and continued advancement on this front will be one component on reducing inflation.

Fran Radanoabrdn Inc.4 April 2023

Ten Largest Investments

As at 31 January 2023

List of Investments

Geographical/Sector Analysis

Geographic Analysis

As at 31 January

Investment Case Studies

Merck & Co

Dividend yield: 2.8%

Merck & Co (MRK) is a global biopharmaceutical company with strong leadership in the immuno-oncology space. It generated nearly $60 billion in sales in 2022 with a 37% operating margin resulting in very strong cash flow generation which has led to the company consistently growing its dividend by 5-6% in recent years. A key driver for these sales has been uptake of Keytruda with its impressive profile for use against an array of cancers. This drug generated $20 billion in sales in 2022 and is expected to grow until it loses patent protection in 2028.

The position in Merck was taken when the multiple on future earnings post the 2028 patent loss on Keytruda appeared undemanding, while at the same time the expectations for other growth drivers had increased, which would bolster the post 2028 earnings stream. Since then, outstanding Phase 3 data for a drug in peripheral arterial hypertension has been presented that supports a multi-billion dollar opportunity. In addition, manufacturing capacity for Gardasil, an HPV vaccine that prevents certain cancers, will come online in 2023 for a product that has been capacity constrained for the last few years. Finally, excellent Phase 2b data for an oral cholesterol lowering drug supports the Phase 3 development and points to a multi-billion dollar opportunity as Merck expects to price the drug at a level that will optimize payer coverage. Confidence that Merck will generate longer term growth has increased, suggesting that efforts to improve margins by the company should be successful. 

Merck has a strong history where it has been on the forefront of efforts to enable patient access to drugs. The company focuses on developing drugs that can reach 75% of the world, with a view towards enabling access from developing countries and underserved populations in the US. Merck has targeted enabling 100 million people to gain access to its medicines by 2025 through a variety of strategies, solutions, and partnerships. And Merck is specifically trying to reach 30 million people from lower and middle income countries as well as underserved US populations with its social investments. The company provides annual updates to measure progress against these goals.

Analog Devices

Dividend yield: 1.9%

Analog Devices (ADI) is a semiconductor company focused on the analog market selling a wide range of products (over 75,000) into a diversified set of more than 125,000 customers. The analog semiconductor market is the most attractive part of the industry, as the products are in most cases designed specifically for particular end-customer products and add a significant part of the value of the end product but are a very small part of the end cost. This results in ADI's products typically having a long life cycle (over 7 years) and also pricing (as the cost is small and replacement is difficult). ADI's largest two end markets are industrial equipment and autos, both of which have structural growth drivers. In industrial equipment, newer generations of machinery have significantly more functionality built into them at the machine level (rather than the remote computer systems that control them), and in autos, the move towards Electric Vehicles is driving a step change in semiconductor content. These trends should drive 7-10% revenue growth per annum over the cycle, providing a supportive medium term revenue backdrop.

Analog semiconductors have properties which do not require leading edge manufacturing capability, which enables ADI to have strong cash generation and attractive gross margins (74% in 2022). In addition, ADI has pioneered technology sharing arrangements with leading Taiwan based fabrication company, Taiwan Semiconductor Manufacturing Company (TSMC), such that ADI does around half of its own manufacturing and outsources the other half to TSMC. The manufacturing processes used are interchangeable, which enables ADI to take back a larger share of production in house in periods of weaker demand, hereby significantly lowering margin volatility over the cycle. We believe that ADI's strong margins and ongoing cash generation are sustainable and with strong medium term growth outlook driven by the structural drivers in its end markets.

ADI has robust management of its main ESG risks, over a five year period the company reduced water usage by 7% despite 70% revenue growth, and management have targets to increase the rate of water recycling in its operations. It also targets 50% reduction in Greenhouse Gas emissions by 2025. The company also stands to benefit substantially from the ongoing growth in Electric Vehicles, which is a significant driver of increased semiconductor content in cars.

Directors' Report

The Company, which was incorporated in 1902, is registered as a public limited company and is an investment company within the meaning of Section 833 of the Companies Act 2006. The Company's registration number is SC005218. 

The Company has been accepted by HM Revenue & Customs as an investment trust subject to the Company continuing to meet the relevant eligibility conditions of Section 1158 of the Corporation Tax Act 2010 and the ongoing requirements of Part 2 Chapter 3 Statutory Instrument 2011/2999 for all financial years commencing on or after 1 February 2012. The Directors are of the opinion that the Company has conducted its affairs for the year ended 31 January 2023 so as to enable it to comply with the ongoing requirements for investment trust status.

The Company has conducted its affairs so as to satisfy the requirements as a qualifying security for Individual Savings Accounts. The Directors intend that the Company will continue to conduct its affairs in this manner.

Results and Dividends

The audited financial statements for the year ended 31 January 2023 are contained on pages 66 to 88 of the 2023 Annual Report. Details of dividends for the year to 31 January 2023 can be found on page 4 of the 2023 Annual Report.

Share Capital and Rights attaching to the Company's Shares

At 31 January 2023, the Company's capital structure consisted of 140,234,749 Ordinary shares of 5p each (2022 - 140, 675,934 Ordinary shares of 5p each). During the year to 31 January 2023, the Company bought back 441,185 Ordinary shares for cancellation. There were no Ordinary shares repurchased for cancellation subsequent to the year end.

The Ordinary shares carry a right to receive dividends which are declared from time to time by an ordinary resolution of the Company (up to the amount recommended by the Board) and to receive any interim dividends which the Company may resolve to pay. On a winding-up, after meeting the liabilities of the Company, the surplus assets will be paid to Ordinary shareholders in proportion to their shareholdings. On a show of hands, every shareholder present in person, or by proxy, has one vote and, on a poll, every Ordinary shareholder present in person has one vote for each share held and a proxy has one vote for every share represented. 

There are no restrictions concerning the holding or transfer of the Company's shares and there are no special rights attached to any of the shares. The Company is not aware of any agreements between shareholders which may result in restriction on the transfer of shares or the voting rights. The rules concerning amendments to the Articles of Association and powers to issue or buyback the Company's shares are contained in the Articles of Association of the Company and the Companies Act 2006. 

Significant Agreements

The Company is not aware of any significant agreements to which it is a party that take effect, alter or terminate upon a change of control of the Company following a takeover and there are no agreements between the Company and its Directors concerning compensation for loss of office. Other than the management agreement with the Manager and the depositary agreement, further details of which are set out below, the Company is not aware of any contractual or other agreements which are essential to its business which ought to be disclosed in the Directors' Report.

Directors

Details of the Directors of the Company who were in office during the year and up to the date of this report are shown on pages 38 to 39 of the 2023 Annual Report. Patrick Edwardson was appointed on 1 July 2022. 

No contract or arrangement existed during the period in which any of the Directors was materially interested. No Director has a service contract with the Company.

Directors' & Officers' Liability Insurance

The Company maintains insurance in respect of Directors' and Officers' liabilities in relation to their acts on behalf of the Company for the year to 31 January 2023 and up to the date of this report. Each Director of the Company shall be entitled to be indemnified out of the assets of the Company to the extent permitted by law against any loss or liability incurred by him in the execution of his duties in relation to the affairs of the Company. These rights are included in the Articles of Association of the Company.

Corporate Governance

The Statement of Corporate Governance, which forms part of the Directors' Report, is shown on pages 44 to 46 of the 2023 Annual Report.

Principal Agreements

Management Agreement

The Company has appointed abrdn Fund Managers Limited ("aFML" or the "Manager"), a wholly owned subsidiary of abrdn plc, as its alternative investment fund manager ("AIFM"). aFML has been appointed to provide the Company with investment management, risk management, administration, company secretarial services and promotional activities. The Company's portfolio is managed by abrdn Inc. (the "Investment Manager") by way of a delegation agreement in place between aFML and abrdn Inc. In addition, aFML has sub-delegated promotional activities to abrdn Investments Limited and administrative and secretarial services to abrdn Holdings Limited. Details of the management agreement, including notice period and fees paid during the year ended 31 January 2023 are shown in note 5 to the financial statements.

Depositary Agreement

The Company has appointed BNP Paribas Trust Corporation UK Limited ("BNPP") as its depositary. During the period, the Depositary was also BNP Paribas Securities Services, London Branch. The depositary agreement was novated to BNPP on 30 June 2022.

Loan Note Agreement

In December 2020, the Company entered into a long-term financing agreement for US$50 million with MetLife comprising two loans of US$25 million with terms of ten and 15 years at an all-in cost of 2.70% and 2.96% respectively, giving a blended rate for ten years of 2.83% (the "Long-Term Financing Agreement").

Substantial Interests

As at 31 January 2023 the Company had received notification or was aware of the following interests in its Ordinary shares:

As at the date of this Report, no changes to the above interests had been notified to the Company.

Accountability and Audit

The Directors who held office at the date of approval of this Directors' Report confirm that, so far as they are each aware, there is no relevant audit information of which the Company's auditor is unaware; and each Director has taken all the steps that he/she could reasonably be expected to have taken as a Director in order to make himself/herself aware of any relevant audit information and to establish that the Company's auditor is aware of that information.

The Audit Committee has reviewed the services provided by the auditor during the year, together with the auditor's fees and procedures in connection with the provision of non-audit services. There were no non-audit service fees paid during the year. The Board remains satisfied that PricewaterhouseCoopers LLP's objectivity and independence is being safeguarded.

Going Concern

The Company's assets consist substantially of securities in companies listed on recognised stock exchanges and in normal circumstances are realisable within a short timescale and which can be sold to meet funding commitments if necessary. 

The Board has set gearing limits and regularly reviews actual exposures, cash flow projections and compliance with banking covenants.

The Company undertakes a continuation vote every three years. The last continuation vote was passed at the AGM held in June 2021 with 98.6% of votes in favour.

The Board has considered the impact of recent market events, such as geopolitical developments and believes that there will be a limited resulting financial impact on the Company's operational resources and existence. Given that the Company's portfolio comprises primarily "Level One" assets (listed on a recognisable exchange and realisable within a short timescale), and the Company's relatively low level of gearing, the Company has the ability to raise sufficient funds so as to remain within its debt covenants and pay expenses.

Taking the above factors into consideration, the Directors have a reasonable expectation that the Company has adequate financial resources to continue in operational existence for the foreseeable future and for at least twelve months from the date of this Report. Accordingly, the Board continues to adopt the going concern basis in preparing the financial statements.

Annual General Meeting

The Notice of General Meeting is included at pages 102 to 106 of the 2023 Annual Report. Among the resolutions being put at the Annual General Meeting ("AGM") of the Company to be held on 8 June 2023 at 2.00pm, the following resolutions will be proposed as special business:

 (i) Section 551 Authority to Allot Shares

Resolution 13, which is an ordinary resolution, seeks to renew the Directors' authority under section 551 of the Companies Act to allot shares (excluding treasury shares) up to an aggregate nominal amount of £2,313,873 or, if less, the number representing 33.33% of the issued Ordinary share capital of the Company as at the date of the passing of the resolution. This authority will expire on 31 July 2024 or, if earlier, at the conclusion of the AGM to be held in 2024 (unless previously revoked, varied or extended). The Directors will only exercise this authority if they believe it is advantageous and in the best interests of shareholders. There are no treasury shares in issue.

(ii) Dis-application of Pre-emption Provisions

Resolution 14, which is a special resolution, seeks to renew the dis-application of statutory pre-emption rights in relation to the issue of shares (or sale of shares out of treasury) up to an aggregate nominal amount of £701,174 or, if less, the number representing 10% of the issued Ordinary share capital of the Company as at the date of the passing of the resolution. This authority will expire on 31 July 2024 or, if earlier, at the conclusion of the AGM to be held in 2024. The Directors will only exercise this authority if they believe it is advantageous and in the best interests of shareholders. Ordinary shares would only be issued for cash at a price not less than the NAV per share.

(iii) Share Repurchases

Resolution 15, which is a special resolution, seeks to renew the Company's authority for the Company to make market purchases of its own Ordinary shares, up to a maximum of 14.99% of the issued Ordinary share capital of the Company as at the date of the passing of the resolution. Shares so repurchased will be cancelled or held in treasury. The principal reasons for share buybacks are:

- to enhance net asset value for continuing shareholders by purchasing shares at a discount to the prevailing net asset value; and

- to address any imbalance between the supply of and demand for the Company's shares that results in a discount of the quoted market price to the published NAV per share.

Recommendation

The Directors believe that the resolutions to be proposed at the AGM are in the best interests of the Company and its shareholders as a whole and recommend that shareholders vote in favour of the resolutions, as the Directors intend to do in respect of their own beneficial shareholdings totalling, in aggregate, 47,718 Ordinary shares, and representing 0.03% of the existing issued Ordinary share capital of the Company.

By order of the Boardabrdn Holdings Limited Secretary, Edinburgh4 April 2023

Statement of Directors' Responsibilities

The Directors are responsible for preparing the Annual Report in accordance with applicable law and regulations. 

Company law requires the Directors to prepare financial statements for each financial year. Under that law they are required to prepare the financial statements in accordance with UK accounting standards, including FRS 102, the Financial Reporting Standard applicable in the UK and Republic of Ireland. 

Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of its profit or loss for that period. In preparing these financial statements, the Directors are required to: 

- select suitable accounting policies and then apply them consistently; 

- make judgements and estimates that are reasonable and prudent; 

- state whether applicable UK accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; 

- assess the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and 

- use the going concern basis of accounting unless they either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so. 

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities. 

Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that complies with that law and those regulations. 

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation inother jurisdictions.

Responsibility statement of the Directors in respect of the annual financial report 

We confirm that to the best of our knowledge: 

- the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and 

- the Strategic Report includes a fair review of the development and performance of the business and the position of the issuer, together with a description of the principal risks and uncertainties that they face. 

We consider this Annual Report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's position and performance, business model and strategy.

For and on behalf of The North American Income Trust plcDame Susan Rice Chair4 April 2023

Statement of Comprehensive Income

Statement of Financial Position

Statement of Changes in Equity

Statement of Cash Flows

Notes to the Financial Statements

For the year ended 31 January 2023