BlackRock North American Income Trust (BRNA) offers a high level of income (currently yielding 5% on a historic basis) from a diversified portfolio of primarily large cap US equities and an extensive option-writing programme. The trust is run by Tony DeSpirito (lead manager), Franco Tapia and David Zhao, who utilise deep fundamental research to create a portfolio of high quality, U.S. dividend-paying companies. Disciplined application of value investment principles and dividend growth are areas of focus for the managers, as they believe these elements are key to achieving long-term returns with low levels of volatility. Income has become a particular focus for the managers following a shift of strategy in 2018 which increased the pay-out by 62% and allowed a proportion to be funded from capital. This dividend level was maintained in 2019 and at the current share price, the trust offers investors a yield of 5.0%. As well as the income from the portfolio and the use of capital reserves, the team makes extensive use of option writing to generate premiums and boost income. Currently the BlackRock team has written options to the value of 15.1% of the portfolio. The trust has an impressive track record for total returns, typically protecting capital well in falling markets and keeping up with the benchmark and peers in rising markets. As we discuss in the Performance section, since the current managers took over in 2014, the trust outperformed peers and benchmark significantly. Currently BRNA trades at a discount of 6.4%.
Companies: Blackrock North American Income
The coronavirus pandemic has caused dividends to be cancelled or cut across the world, but the impact has yet to be fully felt – with more bad news likely to come in the second half of the year. Pressure has come through reduced revenues, due to a slowdown in economic activity and a regulatory interference in dividends being paid by industries which have received taxpayer support. The task for income investors is to identify the regions and sectors which are expected to be less affected; to which the Janus Henderson Dividend Index report has made an important contribution. In this article we summarise the key findings from the detailed report and apply them to the investment trust sectors, highlighting where we think the best opportunities lie.
Companies: BRNA NAIT JETI SOI HFEL BRFI BEE
Companies: BRNA NAIT JETI BGEU SOI HFEL BRFI BEE
Napoleon insisted he would rather have his generals be lucky than good. Increasingly, especially when investing in the US stock market, many investors opt for a passive fund, presumably viewing markets through the same prism that managers are really only ever lucky, as opposed to good. Yet many still choose active funds for a variety of reasons: a preferred investment style (or factor bias), or an alignment between the investor and the manager on the macroeconomic outlook are chief among them. For these investors, forming a view on when different styles are likely to perform, and on which macroeconomic environment we are likely to see is crucial. In this article we look at how different factor indices in North America have performed in different economic and market scenarios. We then examine which US-focussed trusts have offered the closest correlation to these factor indices in the recent past. Understanding the impact that broader economic trends have had on the performance of factors – and, by extension, on trusts that seem to operate in close alignment with those factors – can help us to understand and contextualise historic performance. It may also give us some insights on how to position for any anticipated future environment, although there can be no guarantee that historic patterns will repeat.
Companies: GVP BRNA PCT JAM
BlackRock North American Income Trust (BRNA) offers investors a portfolio of high-quality US companies at attractive valuations, with a track record of strong dividend growth. The trust is overseen by Tony DeSpirito (lead manager), Franco Tapia (co-manager) and David Zhao (co-manager). Last year, in an attempt to attract new investors, the board announced a shift in strategy, increasing the dividend by 62% and allowing a proportion to be funded from capital. At the current share price the trust offers investors a yield of 4.3%. The move has paid off and the trust now trades at a premium of 1.2%. BRNA believes that companies which pay dividends have stronger management teams, and that those that can grow their dividends offer attractive long-term returns at lower levels of volatility. To find these companies, the team uses a bottom-up, stock-specific approach, starting with a universe of the 500 largest US companies by market cap and breaking it down by fundamental analysis. Since the current managers took over in 2014, there has been a marked improvement in the trust’s performance: it has now outperformed the benchmark Russell 1000 Value index in four of the past five calendar years, and this has been achieved at low levels of beta.
All leaderships come to an end at some point. With investment trusts, however, it is rarely the electorate (aka shareholders) who initiate the change in manager. In some cases it is the board. In others, it is the management company itself recognising the need for a new manager, and replacing them before the board feels the need for more decisive action. A change instigated by the board will often result in a transformative outcome for a trust, perhaps with a change in management house as well as personnel. Changes proposed by the management company itself can be just as transformative, but can also be subtler. The aims are always the same: to improve performance for shareholders, and to stimulate demand to bring in the discount, or grow the trust through share issuance. Last week witnessed one of the more dramatic changes of manager in recent years. On 29 November Baillie Gifford effectively took control of the portfolio of European Investment Trust, one of the last remaining value trusts in the sector. The mandate being awarded to Baillie Gifford (the pre-eminent growth investment house) represents a significant change for shareholders, and comes after several years of a growth bull run. Time will only tell whether the board’s decisive (and dramatic) switching of horses will prove correct. In this article we reveal the results of a detailed analysis on how effective past manager changes have been for investment trusts.
Companies: JAM BRNA BRIG MWY
BlackRock North American Income Trust aims to provide an attractive and growing level of income, with capital appreciation over the long term. The managers, Tony DeSpirito (lead manager), Franco Tapia (co-manager) and David Zhao (co-manager), utilise a bottom up stock specific approach to managing the portfolio. The team starts with a universe of the 500 largest US companies by market cap, searching for attractively valued, high quality companies with histories of dividend growth. Currently the portfolio is made up of just 81 holdings. Illustrating the valuation led approach, the average company in the portfolio has a P/E of 13.8x, relative to the average in the benchmark Russell 1000 Value Index of 14.5x. Since Tony DeSpirito took the helm of the portfolio towards the end of 2014, the trust has seen a marked improvement in performance. Over three years (to the end of May 2019) the trust has generated 47.2% in NAV returns, outperforming the Russell 1000 Value Index (42.2%) and only narrowly trailing the average trust in the AIC North American sector (53.4%). The trust has now outperformed the benchmark in three of the past five calendar years. This has been achieved with lower levels of volatility and over the past year the trust has the second lowest beta of the two AIC North American sectors, sitting at just 0.82. Alongside the potential for capital appreciation, one of the key draws for investors is the robust income, with the shares currently yielding 4.5%. The dividend saw a dramatic increase last year, when the board increased its dividend by 61.6% to 8p per share. Part of this is paid from capital reserves, but is also supplemented through option writing, headed by the BlackRock Equity Derivatives option team in Boston. The strong performance, defensive characteristics and now very significant dividend yield have had a clear impact on demand for the shares. The discount has narrowed and the trust currently trades at a premium of 2.8%.
2018 saw the first negative calendar year for the S&P 500 and the Dow Jones since 2008 and, despite a subsequent rally, sentiment remains divided between those who believe the US market has more room to run, and those who think the longest bull market in history will soon come screeching to a halt. Instinctively, it feels like a correction must be due and, indeed, a recent survey of Kepler Trust Intelligence readers showed the majority feel that there are choppy waters ahead. Among those who felt that the outlook was negative, the concern raised most often was the impact of any escalation in the ‘trade-war’ talk between China and the United States, while the national ‘black dog’ that is Britain’s constant companion – Brexit – continues to weigh on investor spirits closer to home. However, there are many other indicators which suggest the bull market could continue, making this a difficult time for investors wondering which way to jump. Against this confusing backdrop we look at three different scenarios for the US over the next year, and identify a number of trusts which are positioned well for each.
Companies: USA ATT GVP JUSC BRNA IBT JAM TPOU
BlackRock North American Income Trust (BRNA) has a diversified portfolio comprised mainly of US equities, focused on the 500 largest stocks by market cap. The company’s objective is to provide an attractive and growing level of income return with capital appreciation over the long term. The managers have a low-turnover approach, and a strong focus on valuation, aiming for well-established cash generative companies with clear revenue streams and the potential for dividend growth. The board announced plans in December last year to boost the dividend the trust pays by paying a small proportion from capital, and have specified a quarterly dividend of 2p per share for the current financial year. As such the trust currently offers a yield of 4.6%, putting it comfortably ahead of all of its comparable peers in the AIC North America sector on yield terms (excluding the highly idiosyncratic, and therefore probably not comparable, Middlefield Canadian Income trust). The trust was launched in September 2012 and, because of its focus on quality and valuations, had a rocky start, underperforming the index in 2013 and 2014 as bond proxies and financials raced ahead. Stock selection also played a part. Since then, Tony DeSpirito, David Zhao and Franco Tapia turned the performance around, focusing particularly on formalising the investment process. This has involved increasing the number of staff in the team, as well as developing a new quant screen to ensure opportunities are flagged up more rigorously. The team now consists of 21 investment professionals, with on average over a decade’s worth of experience. The trust outperformed the index in 2015 and then kept pace with it in 2016. More latterly, BRNA produced almost double the return in NAV terms of the Russell 1000 Value index in 2017, and has comfortably outperformed the benchmark so far in 2018. Over the past year the discount has been relatively volatile, ranging between c.- 10% and -2.3%. At the time of writing, the discount is -2.5%, with the consistent outperformance since 2015 helping to improve sentiment towards the trust. BRNA remains relatively small with net assets of £121m but it offers a very high yield, and this may increase its appeal to larger investors who might otherwise consider it too illiquid to be an option, particularly given the board’s demonstrable willingness to buy back shares.
Two years after the shock election of Donald Trump and with the US mid-term elections approaching on 6 November, we thought it a good time to strip out all the noise and bluster and assess what the Trump administration has really meant for US markets and the trusts that invest in them. We can identify two key policy moves Trump has achieved as President: tax reforms and trade tariffs. Each has significant ramifications for certain sectors and trusts, some good and some bad. The long-term effects are still in the balance, with the midterms a crucial fork in the road. Since Trump was inaugurated as president, the landscape of the US market has arguably transformed, with greater optimism around the near-term prospects for equities and greater pessimism around international relations. We take a look at how trusts have positioned themselves vis-à-vis these trends. “I promised the American people a big, beautiful tax cut for Christmas. With final passage of this legislation, that is exactly what they are getting.” Arguably the most significant piece of Trumpian legislation for the economy and the stock market was his wide-ranging tax reform introduced at the end of December 2017. This included cutting n the corporate tax rate from 35% to 21% and a dramatic change to the current model of taxation, in particular the taxation of US corporations’ foreign subsidiaries.
Companies: IBT USA BRNA ATT JAM JUS GVP GVP
BlackRock North American Income Trust (BRNA) has a diversified portfolio comprised mainly of US equities, focused on the 500 largest stocks by market cap. The company’s objective is to provide an attractive and growing level of income return with capital appreciation over the long term. The managers have a low-turnover approach, and a strong focus on valuation, aiming for well-established cash generative companies with clear revenue streams and the potential for dividend growth. The board announced plans in December 2017 to boost the dividend the trust pays by paying a small proportion from capital, and have specified a quarterly dividend of 2p per share for the current financial year. As such the trust currently offers a yield of 5.2%, putting it comfortably ahead of all of its comparable peers in the AIC North America sector on yield terms. The trust was launched in September 2012 and, because of its focus on quality and valuations, had a rocky start, underperforming the index in 2013 and 2014 as bond proxies and financials raced ahead. Stock selection also played a part. Since then, Tony DeSpirito, David Zhao and Franco Tapia have changed the investment process. This has involved increasing the number of staff in the team, as well as developing a new quant screen with the aim of ensuring opportunities are flagged up more rigorously. The team now consists of 21 investment professionals, with on average over a decade’s worth of experience. The trust outperformed the index in 2015 and then kept pace with it in 2016. More latterly, BRNA produced almost double the return in NAV terms of the Russell 1000 Value index in 2017. Over the past year the discount has been relatively volatile, ranging between c.-10% and -2.3%. At the time of writing, the discount is -3.4%.
The trust has seen performance improve markedly since the appointment of Tony DeSpirito and the overhaul of the investment process which began in October 2014. Over three years to the end of December 2017 the trust is up 52.5% in NAV total return terms, outperforming the Russell 1000 Value index (47.9%) and keeping pace with the average trust in the AIC North America sector. Prior to Tony’s appointment the trust was an underperformer and the discrete figures tell the story. The trust underperformed the index in 2012, 2013 and 2014, hit by a combination of a style which didn’t suit the market and a focus on analyst-led research which, without the rigour of a quant screen, resulted in a number of missed opportunities. Since then the trust has fared better, outperforming the index in 2015 and then keeping pace with it in 2016. The trust produced almost double the return in NAV terms of the Russell 1000 Value index in 2017, but share price performance was hampered by the discount which widened out since the start of 2017. The trust’s largest overweight, toward financials, is yet to make a meaningful contribution toward the trust’s performance but the managers remain positive on the outlook as inflation gathers pace and interest rates become to come along more often. The positive effect of an inflationary environment ahead for financials is compounded by the fact that stress tests and higher capital ratios have ultimately led to banks being easier to judge from a risk perspective than they have been in the past, and in many cases more well insulated by capital buffers. They are also positive on the outlook under Donald Trump’s lighter regulatory touch. The biggest positive contributions have come from the trust’s healthcare and energy positions and this includes their exposure to companies outside the US, like AstraZeneca. It is interesting to note that the managers have allowed a small cash position (5%) to build up which they say, rather than reflecting a bearish position, is an opportunistic cash pile which will allow them to take advantage of any opportunities that arise from the quantitative tapering that is now underway
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FY20A results largely reflect a period prior to the Covid-19 lockdown, yet show Duke entering a more challenging FY21E with momentum. Yesterday's trading update demonstrated another notable rise in quarterly cash receipts for Q2/21, as royalty partner trading continues to improve. As some partners' forbearance measures will expire this month, Q3/21 receipts should continue this upwardly momentum. This opens the door to a return to cash dividends at some future point. Today, Duke also confirms it is now seeking new royalty partners, alongside follow-ons.
Companies: Duke Royalty
With the sale of the Singaporean operations for £1.6bn, the new CEO, Amanda Blanc, shows her intention to focus rapidly on its preferred markets (the UK, Ireland and Canada). The next candidate for sale is the French unit. This transaction is more complicated than the previous one, with the necessity to obtain the agreement of Afer, its key partner in France. With potential proceeds of £2.9bn, Aviva could reduce its debts significantly and allocate more capital to the UK bulk annuity business.
Companies: Aviva Plc
Oil posted its first back-to-back weekly loss since April's rout with the end of the summer driving season and concern about OPEC's production compliance weighing on prices.
Futures in New York edged up on Friday, but prices fell 6.1% this week coinciding with a retreat in U.S. equities. Traders are also examining data indicating the United Arab Emirates since July has been regularly exceeding its quota under a deal between the Organization of Petroleum Exporting Countries and its allies.
The uncertainty over how much supply OPEC+ is returning to the market adds another wrench in the recovery for oil prices still reeling from the pandemic-driven blow to consumption. While U.S. supplies had grown tighter in past months and producers were expected to restrain production amid a weak financial backdrop, stockpiles rose again last week for the first time since mid-July.
Companies: XOM HES KOS JSE 88E ADV CAD CHAR ECHO ENOG EME I3E PMG RBD SQZ SOU TLW VGAS WTE PHAR
What’s new: CLIG results have beaten Zeus expectations at revenue, EPS and DPS. On 14 July CLIG provided an update which revealed $338m of net inflows (6% of opening FUM), outperformance of the Emerging Market and Developed strategies (98% of FuM) and 25% rise in FuM in 4Q to $5.5bn and an indication that the final dividend would be not less than last year. In our opinion, key features of CLIG’s full year results include:
4.4% rise in revenue to £33.3m (Zeus forecast: £32.0m);
6.1% fall in adj PBT to £10.7m (Zeus forecast: £10.3m), excluding gains/losses on seed investment 9.4% rise to £11.6m (FY19: £10.6m);
3.2% rise in adj EPS to 35.3p (Zeus forecast 32.5p);
11.1% rise in final DPS to 20.0p (Zeus forecast: 18p) with the total DPS of 30p (Zeus forecast: 28p) is 11.1% above the prior year excluding special DPS.
Net cash of £14.6m (Zeus forecast: £10.0m)
The acquisition of KMI is expected to complete on 1 October 2020.
Companies: City of London Investment Group Plc
The COVID-19 pandemic has had a significant impact globally in many areas. While primarily a health issue, it has had wide-ranging implications for stock markets, which have now rallied after the plunge in share prices in mid-March when the full severity of the emerging pandemic became more widely appreciated. Nonetheless, the FTSE 100 Index remains almost 20% off its late February 2020 figure.
Companies: AVO ARBB ARIX CLIG DNL GDR ICGT NSF PCA PIN PXC PHP RECI STX SCE TRX SHED VTA YEW
S4 Capital had an extraordinary week with strong interims and an impressive CMD accompanied by a further merger and topped off with winning its third Whopper. Interims were ahead of our expectations and we were particularly encouraged by LFL Gross Profit growth of +18% in July. The group announced the merger with Dare.Win, an award-winning digital creative agency which extends the geographical presence of MediaMonks to France. BMW and MINI consolidated its Pan-European account into a team led by MediaMonks, which is the third whopper account for S4 Capital, and notable in our view for being won in a pitch, rather than by land & expand, and being an automotive rather than technology client. The group held a three day CMD and our summary would be i) Day One demonstrated the compelling strategic logic and strict financial discipline underpinning the group ii) Day Two illustrated the already formidable partner/client list of S4 Capital, including Adobe, Amazon, Google and CAA and iii) Day Three highlighted the chemistry between the individual agencies brought together to form S4 Capital and the outstanding work that they produce. To reflect BMW and Dare.Win we raise our FY21 EPS forecast by +8% to 10.8p (was 10.0p) and continue to view 15p as a realistic target with further whoppers in prospect and the balance of the recent equity raise to deploy. On a 30x multiple, we raise our target price to 450p (was 375p) and retain our Buy recommendation.
Companies: S4 Capital Plc
Frontier IP has announced it has invested £320k in a £720k convertible loan financing of Nandi Proteins. Nandi Proteins is developing functional proteins for food ingredients aimed at reducing levels of fat, additives and gluten in processed foods addressing important social, health and environmental concerns about processed food. Frontier IP holds a 20.1% equity stake in Nandi Proteins; the last disclosed value of the holding was back in July 2017 at approx. £2.9m. Connected in part to the announcement today, we have used the opportunity to refresh our cash flow forecasts to reflect the net £2.1m proceeds of the July 2020 fundraise, the planned deployment of proceeds into bridge financing and refreshed our Sum-of-the-Parts valuation analysis to reflect the excellent portfolio progress made in FY’20. We anticipate a 50% increase in the unrealised profit on the revaluation of investments in FY’20e to £5.82m (vs. £3.0m prior estimate; £3.85m in FY’19). Applying the peer group multiple of 1.6x on Yr1 Book value of late-stage assets and incorporating the £2.1m proceeds and dilution associated with the July placing, implies an intrinsic value of 82p/share, 27% above the current share.
Companies: Frontier IP Group Plc
We believe now is an interesting time to invest in Northgate, with a new executive board and a capable management team in place who have already delivered progress on an ongoing turnaround as we await a full strategic review. The group now has a clear and well communicated capital allocation strategy in place and improved earnings quality, in our view. We believe that the growth opportunity in the UK, the value of the Spanish business and the progress made to date with the turnaround are not being reflected in the share price, which is currently 15.9% below book value (414p per share in FY19A rising to 468p in FY22E). We use a variety of valuation methods including P/B, SOTP, DDM and DCF modelling and arrive at an average implied share price of 450p, 29.0% above the current share price.
Companies: Redde Northgate Plc
Following a solid H120, HgCapital Trust (HGT) announced several portfolio transactions representing a considerable uplift to the carrying value at end March 2020 and translating into a c 12.0% ytd NAV total return (TR) to end August. On completion of these deals, HGT’s cash resources will improve significantly to £314m from £123m in early July, while its unfunded commitments will decline to £814m. Consequently, HGT’s commitment coverage ratio will improve markedly to c 39% vs 13% in early July.
Companies: Hgcapital Trust
Artemis Alpha Trust (ATS LN) has undergone a radical transformation over the past two years following a comprehensive strategic review. In April 2018, the trust held around 90 stocks with approximately 25% of NAV held in unquoted positions. Following the implementation of the review, Kartik Kumar (who has been with Artemis since 2012) was appointed lead manager alongside John Dodd remaining in place with an overseeing role. Kartik has since significantly reduced the number of stocks to a much more concentrated high conviction portfolio of just 36 stocks, and has significantly reduced the unquoted exposure to only 7%. This shift in focus has at the same time improved portfolio liquidity by moving up the market capitalisation scale.
Companies: Artemis Alpha Trust
L&G reported an operating profit from continuing divisions (excluding Mature Savings and General Insurance businesses) of £1,128m, -2.2% yoy. The COVID-19-related cost was £129m. LGR posted a growing operating profit to £721m. Net profit amounted to £290m vs. £874m a year before, being affected by the reduced discount rate used to calculate LGI reserves. The Solvency II ratio stood at 173%. The Board recommended an interim dividend of 4.93p/share, stable relative to H1 19.
Companies: Legal & General Group Plc
Avation is a lessor of commercial aircraft to a diversified airline client base. In relation to the ongoing administration process of Virgin Australia, Avation has this morning announced that following the successful placing of five of the original thirteen aircraft that were on lease to the airline (two Fokker 100s plus three ATR 72-500s, with the latter having gone to two new customers), the remaining eight aircraft will be returned to Avation, being made up of three ATR 72-500s and five ATR 72-600s. Additionally, subject to approval at a creditors' meeting scheduled for 4 September 2020, the expected return to unsecured creditors is now anticipated at between 9-13% being paid prior to 30 June 2021.
Companies: Avation Plc
Deltic Energy is entering an exciting phase in its development based on its fully funded joint-venture projects with Shell. Preparations are now underway for an exploration well to test the Pensacola Zechstein prospect in the SNS (Southern North Sea). Deltic has indicated that it expects the current contingent well commitment to become firm on schedule by December 1, 2020. Drilling, according to Deltic, should follow in H2 2021. We see scope for positive news flow over the next few months, not least from the evaluation of Shell’s recently obtained processed 3-D seismic over Pensacola. Following Pensacola, the Selene prospect is scheduled to be drilled in mid-2022. The recent 32nd Round UKCS licence awards greatly expands Deltic’s exploration potential in the CNS and particularly the SNS Carboniferous fairway. Here some highly prospective acreage has been obtained.
Companies: Deltic Energy Plc
Belvoir’s H1 results evidence both strategic progress and profits growth. Given the challenges presented by COVID-19, this bodes very well for the group’s long-term growth potential. H1 adj. EPS grew +16%, the acquisition of Lovelle contributed well and in July the group entered into a strategic alliance with The Nottingham Building Society. Cash flow remained strong and the progressive dividend policy has been reinstated, with a 3.4p interim declared plus an additional 2p, as partial compensation for the missed 2019 final. With the resilience of lettings and the current record activity levels in sales and new mortgages the Board is optimistic that full-year results will hit its pre-COVID expectations and we make no changes to our PBT/EPS forecasts. Our target price of 233p (48% upside) assumes a 10% discount to the small/mid cap market. Given the above average performance in H1 and continued evidence that the long-term growth strategy is yielding value we see good upside to this target over time.
Companies: Belvoir Group Plc
S4 Capital has reported interim results that are ahead of our expectations and indicates an acceleration in the pace of recovery in Q3. LFL Gross Profit rose +12.2% in H1, with Q1 +18.8% and Q2 +6.5%. Encouragingly, after the trough of +3% in April, recovery accelerated to +5% in May, +11% in June and July was an impressive +18% ahead. PBT and EPS were both slightly better than our forecasts, while the group delivered a particularly impressive cash performance leaving it with net cash in June even before the £113m July placing. While we maintain our FY20 LFL Gross Profit growth forecast of +14% (Q3 +12%, Q4 +18%), the strong July result makes this look conservative. Further, the group awaits the outcome of two 'whopper' pitches each worth $20m+ with one due 'very shortly' and it can now see the pathway to 20 whoppers. S4 Capital is in a growth sweetspot and has already started to deploy the funds from the July placing to build capability in eCommerce (Orca Pacific) and econometrics/media optimisation (Brightblue). There are a number of moving parts in our forecasts and overall we retain our EPS estimates of 7p for this year, rising to 10p in 2021. We believe landing the whoppers combined with further M&A as the group deploys its recent equity raise & increased debt facility could see EPS of 15p next year.