Editing BlackRock Sustainable American Income Trust

== 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.

'''The analyst’s view'''

== Market outlook: Macro uncertainties warrant selectivity ==

Exhibit 2a 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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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>

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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.

== Peer group comparison ==

== 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.

== 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.

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.

== 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.

== The board ==

==Notes==