The lack of exposure to non-dividend-paying technology stocks has hampered performance at BlackRock Sustainable American Income (BRSA ), which is concerned by ‘warning signs’ in the US economy.

The £147m portfolio, run by Tony Despirito, David Zhao and Lisa Yang, reported a 5.6% slide in its net asset value (NAV) in the year to 31 October, the 5% decline in its benchmark Russell 1000 Value index, while the shares fell 8.1%.

In the past three months NAV and share price are up 7% and 3.3%, leaving the trust on a 12% discount.

That’s left shareholders with a total five-year return of 32.4% at 13 February, despite an underlying 50.7% asset return. That’s half the 100% total return of the S&P 500.

The difference between the value index and the main indices on Wall Street is the lack of exposure to technology stocks in the former – over the same period the Russell 1000 Growth index was up 12.9%. Tech – notably the Magnificent Seven comprised of Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla – has driven returns in the US, riding the wave of AI hype and expectations for interest rate cuts.

Despirito said the largest detractor from performance was the lack of exposure to ‘interactive media and services industry’, in particular Meta Platforms, comprising social media platforms Facebook and Instagram.

‘Meta is broadly ineligible for our portfolio given it has not been a quality dividend payer and scores poorly on environmental, social and governance (ESG) metrics,’ said Despirito.

‘While Meta’s data security framework includes strong measures such as board-level oversight, it remains ineligible for our portfolio.’

He noted that the company was moved from the Russell value index into growth at the end of the second quarter. The shares have soared 162% in the past 12 months.

The portfolio does have exposure to IT, which makes up 13.5% of the portfolio. An increasing number of these stocks are what the managers term ‘industrial tech’ which are ‘competitively insulated from disruptors, well-positioned to take advantage of long-term secular tailwinds, and exhibit growth in earnings and free cashflow’. These in turn allow dividend growth.

‘This is in stark contrast to the dotcom era where growth was often prioritised over shareholder return,’ said Despirito. ‘We believe this trend is poised to continue.’

The trio favours IT services and communication companies, such as consultancy Cognizant Technology Solutions and Cisco Systems, and continues to invest in Magnificent Seven stock Microsoft thanks to its ‘capital-light business model’.

The largest contributor to performance was healthcare, where it has an 18.4% weighting, in particular Novo Nordisk, which has seen its shares soar on the back of the success of its diabetes drug Wegovy as a weight-loss treatment for obese adults.

Despirito said ageing populations are driving growth in pharmaceuticals, healthcare equipment and supplies.

‘We prefer to invest in pharma companies with a proven ability to generate high research and development productivity versus those that focus on one or two key drugs and rely upon raising their prices to drive growth,’ he said.

Outside of pharma, the managers initiated a position in Cardinal Health, which specialises in the distribution of drugs and medical products.

Given the gains made in the first half of the financial year quickly faded in the second half, Despirito is cautious going into 2024 and said ‘warning signs continue to flash’ given cooling inflation and persistent economic growth.

‘These warning signs lead us to believe that the US economy is late cycle, meaning economic activity has reached its peak and the next phase would feature a slowing US economy with an elevated risk of recession,’ he said.

‘Valuation gaps have grown substantially year-to-date and absolute valuations are beginning to look expensive yet again,’ he said.

Christopher Brown, investment companies analyst at JPMorgan Cazenove, said BRSA ranked fourth out of six US investment trusts in terms of its total NAV return over five years. ‘In the past year this differential vs peers is partly explained by the value style underperforming the technology led S&P 500, but with BRSA having also underperformed vs its reference index, it is clear that stock selection has played a part,’ he said.