North American Income cuts fee and prays for long value rally

The trust’s manager, Aberdeen Standard Investments, has reduced its fee as the long-term value laggard hopes the recent rotation from growth will boost its performance.

North American Income (NAIT ) fund manager Aberdeen Standard Investments has reduced its fee as the long-term value laggard hopes the recent rotation from growth will boost its performance.

The £378m closed-ended fund had a difficult year to 31 January, annual results showed, underperforming US equity indices and its peers, with the net asset value total return declining 5.7%. Although it does not have a formal benchmark, this does not compare favourably to its primary reference point, the Russell 1000 Value index, which eased 0.1% or the more growth-orientated S&P 500, which rose 12.6%.

The poor performance means the shares were unable to reverse the widening of the discount suffered during the height of the Covid-19 sell-off. The trust moved from a premium of 3% to a discount of over 11% in just four weeks and currently trades at a discount of 8%.

The board has managed to avoid succumbing to a dividend cut and announced a 10p per share payment for the year, up from 9.5p last year, which brings some comfort to investors.

They will also be pleased to learn that the board has negotiated a fee reduction with Aberdeen Standard. From 1 May, the trust will lower the tier at which the highest fee rate of 0.75% is charged to £250m from £350m. A charge of 0.6% will be charged on assets between £250m and £500m, and 0.5% thereafter.

Trust chair James Ferguson said, assuming the trust assets stay above £350m, this would ‘save the company £150,000 per year and will mean that the company’s fees are among the most competitive in the peer group’.

Although NAIT’s performance looks less than competitive with shareholder returns below the peer group and the S&P 500 over one, three, five and ten years, there are nascent signs of improvement with the shares up nearly 15% in the past three months.

Fund managers Ralph Bassett and Fran Radano (pictured) contributed the underperformance to an underweight position in communication services and stock selection in utilities and consumer staples.

The worst performers was banking giant Citigroup which agreed a $400m fine with the US regulator for ‘serious ongoing deficiencies’ in its risk management systems.

Oilfield services provider Schlumberger was also a drag on returns as its share price declined alongside the oil price and the managers exited the position in May.

They also sold FirstEnergy in October after ‘the US government alleged that the company had contributed to a non-profit political action committee in exchange for government subsidies for nuclear power plants owned by its former subsidiary FirstEnergy Solutions’.

Bassett (pictured) and Radano tried to make the best of the sell-off, using volatility to ‘upgrade portfolio quality’ and initiated position in home improvement retailer Home Depot, consumer giant Procter & Gamble, and media group Comcast among others.

The duo believe there are ‘distinct drivers’ for the US stock market, including the large stimulus packages being put in play by president Joe Biden’s administration. He has already announced a $1.9tn recovery package and another $2tn infrastructure plan, which the managers said would act as a broad-based demand accelerator.

They are also ‘keeping a close eye on household balance sheets and the implications of high cash balances for both potential consumption and deleverage’ and said so far consumer are in ‘relatively good standing’.

‘What gives us more comfort is that corporate fundamentals remain relatively robust and companies across sectors have indicated a willingness to continue to invest aggressively in their businesses given strengthening demand,’ they said. 

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