Editing BlackRock Sustainable American Income Trust
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== Summary == | == Summary == | ||
BlackRock Sustainable American Income Trust (BRSA) changed its investment strategy at the end of July 2021 to integrate explicit ESG objectives. It has three managers: Tony DeSpirito, David Zhao and Lisa Yang, who form part of BlackRock’s US income & value investment team. They aim to deliver an attractive level of income and long-term capital appreciation from a portfolio of dividend-paying companies that are trading at attractive valuations and are deemed to be ESG leaders, improvers or ‘sustainability enablers’. The managers explain that growth companies tend to be highly rated on ESG metrics, but BRSA offers a value fund with superior ESG traits, which sets it apart from the competition. Growth stocks have led the US market over the last decade; however, data from BlackRock show that value stocks should perform relatively better in the current environment of rising interest rates. | BlackRock Sustainable American Income Trust (BRSA) changed its investment strategy at the end of July 2021 to integrate explicit ESG objectives. It has three managers: Tony DeSpirito, David Zhao and Lisa Yang, who form part of BlackRock’s US income & value investment team. They aim to deliver an attractive level of income and long-term capital appreciation from a portfolio of dividend-paying companies that are trading at attractive valuations and are deemed to be ESG leaders, improvers or ‘sustainability enablers’. The managers explain that growth companies tend to be highly rated on ESG metrics, but BRSA offers a value fund with superior ESG traits, which sets it apart from the competition. Growth stocks have led the US market over the last decade; however, data from BlackRock show that value stocks should perform relatively better in the current environment of rising interest rates. | ||
'''The analyst’s view''' | '''The analyst’s view''' | ||
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== Change of name and investment strategy == | == Change of name and investment strategy == | ||
Following shareholder approval at a general meeting held on 29 July 2021, BRSA’s investment mandate was changed to incorporate explicit ESG objectives, as the board is mindful of the increased demand for investment products that place a sustainable investment philosophy at their core – a trend that has accelerated in recent years. The changes are intended to enhance the experience of existing shareholders and to increase the trust’s appeal to new investors. In Exhibit 1 | Following shareholder approval at a general meeting held on 29 July 2021, BRSA’s investment mandate was changed to incorporate explicit ESG objectives, as the board is mindful of the increased demand for investment products that place a sustainable investment philosophy at their core – a trend that has accelerated in recent years. The changes are intended to enhance the experience of existing shareholders and to increase the trust’s appeal to new investors. In Exhibit 1 we highlight the consistencies and changes in BRSA’s strategy. | ||
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|+Exhibit 1: Key elements of BRSA’s strategy<ref>Source: BRSA, Edison Investment Research.</ref> | |+Exhibit 1: Key elements of BRSA’s strategy<ref>Source: BRSA, Edison Investment Research.</ref> | ||
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== Market outlook: Macro uncertainties warrant selectivity == | == Market outlook: Macro uncertainties warrant selectivity == | ||
Exhibit | Exhibit 2 (left-hand side) shows the performance of US and UK shares over the last decade. The broad US market, as shown by the S&P 500 Index, has performed significantly better than both US value and UK shares. It is unsurprising that within the US, investors have favoured growth over value names given the ultra-low level of interest rates. However, the macroeconomic backdrop is changing; inflationary pressures are building, fuelled by higher commodity and wage costs, and the US Federal Reserve has started to tighten monetary policy. Risks of an economic slowdown or a recession are rising, especially if the central bank is behind the curve and has to accelerate the pace of interest rate increases to try and combat higher inflation. The geopolitical environment is also challenging due to the war in Ukraine and ongoing tensions between the US and China. | ||
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|+ | |+Valuation metrics of Datastream indices (at 24 May 2022)<ref>Source: Refinitiv, Edison Investment Research.</ref> | ||
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There are three main elements to BRSA’s investment process: | There are three main elements to BRSA’s investment process: | ||
Idea generation – the managers aim to identify the best ESG and alpha opportunities from an investment universe primarily made up of North American large- and medium-cap equities, although up to 25% of the portfolio can be invested in liquid non-North American companies. ESG exclusion screens are used to narrow the investment universe. The managers are able to leverage the best fundamental and thematic ideas from BlackRock’s US income & value platform to generate a pipeline and prioritise the research agenda. | |||
Fundamental research – this involves assessing the materiality of a firm’s ESG and sustainability factors and evaluating its important earnings drivers, along with engaging with company managements on business and ESG issues. A research document is prepared to illustrate the investment thesis and is discussed within the investment team. The managers evaluate how and over what time frame they expect their research insights to be reflected in a company’s share price. | |||
Portfolio construction – the fund typically has 30–60 high-conviction positions. Gearing of up to 20% of net asset value (NAV) is permitted, but is likely to be in a 0–10% range, with 5% seen as a neutral level. There are clear buy and sell disciplines for both fundamental and ESG considerations. Portfolio risks and exposures are carefully monitored, with an emphasis on stock-specific risk. The fund is diversified by sector, industry and style factors. | |||
== The fund managers: Tony DeSpirito, David Zhao and Lisa Yang == | == The fund managers: Tony DeSpirito, David Zhao and Lisa Yang == | ||
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In FY21 (ending 31 October 2021) BRSA’s NAV and share price total returns of 36.0% and 42.4% were ahead of the reference index’s 35.6% total return. The largest positive contributor to the trust’s relative performance was stock selection and asset allocation within the financials sector, notably overweight exposures to banks and insurance companies. Negative relative contributors to BRSA’s performance included the real estate sector, both in terms of positioning (as the fund was underweight versus the reference index) and from stock selection within REITs. While writing covered call options enhanced the trust’s income in FY21, it capped the fund’s participation in a rising US stock market. The use of an options overlay was discontinued following the change in strategy in late July 2021. | In FY21 (ending 31 October 2021) BRSA’s NAV and share price total returns of 36.0% and 42.4% were ahead of the reference index’s 35.6% total return. The largest positive contributor to the trust’s relative performance was stock selection and asset allocation within the financials sector, notably overweight exposures to banks and insurance companies. Negative relative contributors to BRSA’s performance included the real estate sector, both in terms of positioning (as the fund was underweight versus the reference index) and from stock selection within REITs. While writing covered call options enhanced the trust’s income in FY21, it capped the fund’s participation in a rising US stock market. The use of an options overlay was discontinued following the change in strategy in late July 2021. | ||
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|+Exhibit 8: Share price and NAV total return performance, relative to indices (%)<ref>Source: Refinitiv, Edison Investment Research. Note: Data to end-April 2022. Geometric calculation.</ref> | |+Exhibit 8: Share price and NAV total return performance, relative to indices (%)<ref>Source: Refinitiv, Edison Investment Research. Note: Data to end-April 2022. Geometric calculation.</ref> | ||
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BRSA’s relative performance is shown in Exhibit 8. The most relevant column is SC, which is since the trust’s change in strategy at the end of July 2021. BRSA has outpaced the performance of the reference index in both NAV and share price terms since then. Sectors that have contributed positively to this outperformance include communication services, financials and technology. The consumer staples sector has detracted from BRSA’s relative performance both in terms of an underweight exposure versus the reference index and from stock selection. Another thing to note is how well the trust has performed versus the broad UK market over almost all of the periods shown. BRSA has lagged the performance of the bellwether US S&P 500 Index over the last three and five years. This is unsurprising given that until the recent rotation towards value/cyclical stocks, investors have generally favoured growth stocks, as evidenced by the multi-year outperformance of the technology sector to the end of 2021. | BRSA’s relative performance is shown in Exhibit 8. The most relevant column is SC, which is since the trust’s change in strategy at the end of July 2021. BRSA has outpaced the performance of the reference index in both NAV and share price terms since then. Sectors that have contributed positively to this outperformance include communication services, financials and technology. The consumer staples sector has detracted from BRSA’s relative performance both in terms of an underweight exposure versus the reference index and from stock selection. Another thing to note is how well the trust has performed versus the broad UK market over almost all of the periods shown. BRSA has lagged the performance of the bellwether US S&P 500 Index over the last three and five years. This is unsurprising given that until the recent rotation towards value/cyclical stocks, investors have generally favoured growth stocks, as evidenced by the multi-year outperformance of the technology sector to the end of 2021. | ||
== Peer group comparison == | == Peer group comparison == | ||
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== Dividends: Partly funded from distributable reserves == | == Dividends: Partly funded from distributable reserves == | ||
In FY21, BRSA’s revenue earnings were 4.06p per share, which was a 38.9% decline compared with 6.65p per share in FY20. However, this needs to be put into context, as historically around 2.00p per share of the trust’s income was generated from writing options, which ceased with the change in strategy at the end of July 2021. Four quarterly interim dividends of 2.00p per share were paid in FY21. At the end of FY21 the trust had a c £0.5m revenue reserve and a further c £117.5m in other distributable reserves. Following shareholder approval at the 22 March 2022 AGM, BRSA’s c £44.9m share premium account was cancelled and converted into an additional distributable reserve. The trust’s total c £162.9m distributable reserves are equivalent to around 25x the last annual dividend payment. Based on its current share price, BRSA offers a 4.0% dividend yield. | In FY21, BRSA’s revenue earnings were 4.06p per share, which was a 38.9% decline compared with 6.65p per share in FY20. However, this needs to be put into context, as historically around 2.00p per share of the trust’s income was generated from writing options, which ceased with the change in strategy at the end of July 2021. Four quarterly interim dividends of 2.00p per share were paid in FY21. At the end of FY21 the trust had a c £0.5m revenue reserve and a further c £117.5m in other distributable reserves. Following shareholder approval at the 22 March 2022 AGM, BRSA’s c £44.9m share premium account was cancelled and converted into an additional distributable reserve. The trust’s total c £162.9m distributable reserves are equivalent to around 25x the last annual dividend payment. Based on its current share price, BRSA offers a 4.0% dividend yield. | ||
== Valuation: Broadly trading around a 5% discount == | == Valuation: Broadly trading around a 5% discount == | ||
BRSA is currently trading at a 4.3% discount to cum-income NAV, which compares to a range of a 1.3% premium to an 8.9% discount over the last 12 months. It is wider than the average discounts of 4.8%, 3.1% and 3.2% over the last one, three and five years respectively. There is scope for a higher valuation if investors gain a greater understanding about the trust’s change in strategy with ESG considerations at the heart of the investment process. | BRSA is currently trading at a 4.3% discount to cum-income NAV, which compares to a range of a 1.3% premium to an 8.9% discount over the last 12 months. It is wider than the average discounts of 4.8%, 3.1% and 3.2% over the last one, three and five years respectively. There is scope for a higher valuation if investors gain a greater understanding about the trust’s change in strategy with ESG considerations at the heart of the investment process. | ||
Renewed annually, BRSA has the authority to repurchase up to 14.99% and allot up to 10% of its share capital. In November 2020, 190k shares were repurchased at an average 6.8% discount, costing c £0.3m, while in April 2021, 445k shares were reissued from treasury at an average 1.7% premium to NAV for a gross consideration of c £0.9m. No further shares have been repurchased or reissued since then. | Renewed annually, BRSA has the authority to repurchase up to 14.99% and allot up to 10% of its share capital. In November 2020, 190k shares were repurchased at an average 6.8% discount, costing c £0.3m, while in April 2021, 445k shares were reissued from treasury at an average 1.7% premium to NAV for a gross consideration of c £0.9m. No further shares have been repurchased or reissued since then. | ||
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== Capital structure == | == Capital structure == | ||
BRSA is a conventional investment trust with one class of share. There are 80.2m ordinary shares in issue. At end-FY21, 96.4% of the trust’s shares were held by banks or nominees (including retail investor platforms), which was a modest decrease compared with 98.1% at end FY20. BRSA’s average daily trading volume over the last 12 months was c 120k shares. | BRSA is a conventional investment trust with one class of share. There are 80.2m ordinary shares in issue. At end-FY21, 96.4% of the trust’s shares were held by banks or nominees (including retail investor platforms), which was a modest decrease compared with 98.1% at end FY20. BRSA’s average daily trading volume over the last 12 months was c 120k shares. | ||
== The board == | == The board == | ||
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On 22 March 2022, the board announced the appointment of David Barron as a non-executive director, with immediate effect. He has 25 years’ investment management experience and until November 2019 was CEO of Miton Group, having spent six years with the firm. Prior to this, Barron was head of investment trusts at JP Morgan Asset Management for more than 10 years, having joined Robert Fleming in 1995. He is currently chairman of Dunedin Income Growth Investment Trust, a non-executive director of Fidelity Japan Trust and a non-executive director of Premier Miton Group. Barron is also a lay member of the Council of Lancaster University. He is a member of the Institute of Chartered Accountants of Scotland having qualified with Thomson McLintock (now KPMG). Like his fellow directors, Barron is a member of BRSA’s audit and management engagement and nomination committees. | On 22 March 2022, the board announced the appointment of David Barron as a non-executive director, with immediate effect. He has 25 years’ investment management experience and until November 2019 was CEO of Miton Group, having spent six years with the firm. Prior to this, Barron was head of investment trusts at JP Morgan Asset Management for more than 10 years, having joined Robert Fleming in 1995. He is currently chairman of Dunedin Income Growth Investment Trust, a non-executive director of Fidelity Japan Trust and a non-executive director of Premier Miton Group. Barron is also a lay member of the Council of Lancaster University. He is a member of the Institute of Chartered Accountants of Scotland having qualified with Thomson McLintock (now KPMG). Like his fellow directors, Barron is a member of BRSA’s audit and management engagement and nomination committees. | ||