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21. Uncovering Trusts – BlackRock American Income Trust (BRAI)
44 Plays15 days ago
In this episode, our director of content, investment trusts Milosz Papst explores the BlackRock American Income Trust (BRAI), which aims 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’. He explains the reason for the recent change in the trust’s name and discusses its distinct approach to investing in US equities, including its quality and value bias. In this context, he talks about the trust’s sector exposures, including healthcare, industrial technology, and energy. Finally, he summarises the trust’s approach to dividends and buybacks.
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About ‘Uncovering Trusts’
'Uncovering Trusts': is a podcast run by Edison analysts released every two weeks. Subscribe to hear analyst interviews on how investment trusts maximise returns while managing risks for investors.
About Edison:
Edison is a content-led IR business. We believe quality investment content should inform all investors, not just brokers. Our mission: engage and build bigger, better-informed investor audiences for our clients.
Edison covers 50+ investment trusts, read about them here: https://www.edisongroup.com/equities/investment-companies/
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Transcript
Introduction to 'Uncovering Trusts'
00:00:05
Speaker
Welcome to Uncovering Trusts, a podcast by the Edison Group, a content-led IR business integrating analyst content digital targeting and investor engagement.
BlackRock American Income Trust Discussion
00:00:16
Speaker
Each episode will uncover the distinct features and latest developments of a selected listed investment company.
00:00:22
Speaker
So tune in to find interesting investment ideas and to stay on top of what's happening in the investment company sector. I'm your host, Will Manuel, and today I'm joined by Milosz Pabst, Director of Investment Company Content at the Edison Group, who will today talk about BlackRock American invest Income Trust, ticker BRAI. Milosz, thanks for joining us today.
Regulatory Changes
00:00:46
Speaker
Good to be here. So to kick things off, I understand that the trust has been affected by a regulatory change. Indeed, it has. Recently, the trust's name and ticker were changed from BlackRock Sustainable American Income Trust with ticker BRSA, which was in response to the Financial Conduct Authority's sustainability disclosure requirements, ah referred to as SDR, and which became effective on the 2nd of December this year.
00:01:13
Speaker
As the trust had sustainable in its name, it would have had to adopt an investment approach that enabled one of four sustainable labels under SDR to be applied, which are mixed goals, improvers, impacts, or focus. The trust board believes that the trust's current investment philosophy and process remains appropriate to shareholders. So instead of changing the investment approach, the board decided to change the name of the trust, meaning that VRAI is classified as an unlabeled ESO.
ESG Objectives and Strategy Shift
00:01:44
Speaker
Okay, thanks for that useful clarification. So should we move on to a more general introduction to BRAI? Of course. I need to refer to July 2021 when the trust, which was then known as BlackRock North American Income Trust, with a focus on income and the value, changed its name to BlackRock Sustainable American Income Trust and incorporated explicit ESG objectives into its investment mandate.
00:02:07
Speaker
ah This move was intended to enhance ah the experience of existing shareholders and to increase the trust's appeal to new investors. There were also other strategy changes, including a higher exposure to mid-cap equities, a reduction in the number of portfolio holdings from between 80 and 120 to 30 to 60, and the introduction of a gearing facility.
00:02:30
Speaker
Throughout the Trust's evolution, the Trust has been managed by three members of BlackRock's well-resourced US income and the value investment team. Tony Desperito, David Zhao and Lisa Yang 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. Typically, growth companies tend to be highly rated on ESG metrics, but the trust offers a value fund with superior ESG trades, which I believe sets it apart from the competition. The trust performance is measured against a broad US $1000 value reference in index.
00:03:11
Speaker
Okay, so now we've covered the trust background in some detail.
Investment Process Overview
00:03:14
Speaker
Can we focus more on the investment process? Well, essentially, there are three main steps in the trust process. The first is idea generation, where the managers aim to identify the best alpha opportunities from investment universe, primarily made up of US large and medium cap equities, although up to 25% of the portfolio can be invested in ah liquid non-US listed companies.
00:03:39
Speaker
Yes, the exclusion screens are used to narrow the investment universe. Desperito Zhao and Yang are able to leverage the best fundamental and thematic ideas from BlackRock's US income and value platform to generate a pipeline and so prioritize the research agenda.
00:03:55
Speaker
Step 2 is fundamental research, which involves assessing the materiality of a firm's ESG factors and evaluating its important earnings drivers, along with engaging with company management on business and ESG issues. A research document is prepared to to illustrate the investment thesis and is discussed within the investment team.
00:04:15
Speaker
um The managers evaluate how and over what time frame they expect their research insights to be reflected in a company's share price. Moving on to stage three, which is portfolio construction. As mentioned previously, the fund typically has between 30 and 60 high conviction positions, um gearing of up to 20% of NAVs permitted, but it's likely to be in a range between 0 and 10%, with 5% seen as a neutral level.
00:04:42
Speaker
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.
Portfolio Details and ESG Scores
00:04:52
Speaker
Great, thank you. So um maybe now we can drill down a little bit more to raise portfolio. Yes, so the trust is unique among the seven funds, five US and two Canadian, in the IAC in North America sector, with its focus on companies with intrinsic values that are not fully captured in the share prices.
00:05:10
Speaker
and that have favorable ESG scores. Comparing the trust portfolio characteristics versus those of the reference index, and they tend to have similar yields, ah but the trust has higher growth and quality attributes at a lower valuation. Due to the quality and value investment approach, the trust portfolio is relatively defensive. This is borne out by ah our upside and downside capture analysis, which shows that the fund's performance should be relatively resilient during periods of stock market weakness, although it may not capture the full upside when markets rise.
Sector Insights: Healthcare, Industrial, Energy
00:05:42
Speaker
When investors have had an intense focus on AI, ah particularly on the magnetism seven stocks, there are themes available in the US market that the trust managers find appealing, um including in the healthcare, care industrial and energy sectors.
00:05:56
Speaker
Now, growth in the healthcare sector is supported by favorable demographic trends. Aging populations mean steady demand growth for medicines and rising costs mean healthcare companies are looking to cut costs and increase efficiency. There is an elevated level of innovation in areas such as obesity, cancer, and gene therapy. GLP1 drugs, originally used in the treatment of diabetes, are now in high demand to treat obesity and are being trialed for other indications.
Geographic and Sector Breakdown
00:06:23
Speaker
Our listeners can discover more about the healthcare sector in our recent thematic report and podcasts, which is available on our website and podcast platforms. In the industrial sector, manufacturers are reassessing their supply chains following disruption during the the global pandemic and rising geopolitical tensions. This has led to an increase in nearshoring, manufacturing closer to home, and French shoring, so relocating manufacturing to allied regions. Mexico is a key beneficiary of nearshoring by US manufacturers in areas such as IT hardware and communication equipment.
00:06:58
Speaker
While traditional energy stocks may not seem a natural fit for the trusts, given its ESG focus, these companies are critical in the transition towards renewable energy or commitments to carbon neutral outcomes.
00:07:10
Speaker
Great. Thanks, Milos. Can you provide now a few more details about how the trust portfolio has broken down? Of course. To start with, unsurprisingly, the majority of the fund is made up of US stocks with the balancing companies from a few overseas countries. In terms of sector, the bottom-up stock selection approach means that the trust's active weights versus the US value thousand reference index can be meaningful.
00:07:34
Speaker
The trust largest overweight exposure technology where the managers are finding an increasing number of companies in the sector that they refer to as industrial tech. ah These businesses are insulated from competitive disruptors and well positioned to benefit from long term secular tailwinds.
00:07:51
Speaker
and a growing earnings and free cash flow, which allows more technology companies to pay growing dividends. Preferred areas within the technology sector include hardware, storage and peripherals, and communications equipment companies with sticky revenues, streams, and IT services. The trust retains a notable underweight exposure to industrial stocks, given the advanced stage of the current economic cycle and so generally unattractive valuations.
00:08:16
Speaker
The trust top 10 holdings make up around a quarter of the portfolio and are generally US stocks across a range of industries.
Dividends and Share Management
00:08:23
Speaker
Great. So before we wrap up, are there any ah other aspects of the trust that we need to highlight? Yes, there are a couple of things to think about. Dividends and share repurchases. The trust has considerable distributable reserves, which has allowed the board to supplement income and continue to pay an eight cent annual dividends made up of four regular um quarterly payments for the last seven financial years. And this trend is expected to continue. As a result, the trade offers an attractive above market dividend yield.
00:08:52
Speaker
Now, renewed annually, the Trust Board has the authority to repurchase up to 14.99% and a lot up to 10% of its share capital. Due to the prevailing discount win in October 2023, when in general, investment companies' discounts had widened to levels last seen during the global financial crisis, the Trust Board restated share buybacks.
Closing Remarks
00:09:13
Speaker
Shares are currently being repurchased regularly and are held in Treasury.
00:09:17
Speaker
Thank you for explaining the important features of this unique investment trust. It's been very interesting. You've been listening to Uncovering Trusts, a podcast by the Edison Group. If you want to find out more about BlackRock American Income Trust and other investment companies that we cover, please visit www.edisongroup dot.com.