BlackRock American Income seeks to become first ‘systematic’ trust
BlackRock American Income (BRAI ) has proposed a package of changes including a new investment approach, fee cut and tender offer for up to 20% of the shares.
The £142m trust wants to shift to a ‘systematic’, or quant-driven, investment process – that is believed to be a first for the UK investment companies sector. This will combine the ‘power of big data, AI and human expertise’ while still harnessing the investment trust structure via measures like enhanced dividends and gearing.
In response to shareholder feedback, the trust will maintain its value investment strategy but slightly narrow its geographic focus from North America to the US.
The proposals, which shareholders can vote on in April, come after a period of performance that has been ‘challenged for some time’, the board announced last week. The trust has also faced an entrenched discount, which has narrowed to 5% since the announcement.
Following the removal of ‘sustainable’ from the trust’s name last year in response to new UK fund-naming rules, the BlackRock trust will also scrap baseline screens and ESG outperformance targets.
Management will shift internally from Tony DeSpirito, David Zhao and Lisa Yang to the US asset management giant’s systematic active equity team.
Interestingly, the proposed new strategy, combining a quant-driven approach with measures to generate higher income, parallels some increasingly popular options in the active ETF space.
Other significant changes include enhanced dividends of 6% of net asset value (NAV) each year and a halving in base management fees to 0.35%. BlackRock will also cover the costs of the process change and offer a six-month holiday on fees from May to October.
In addition to offering shareholders the chance to tender up to 20% of the share capital at a 2% discount to NAV – allowing a partial exit – the board has also proposed a performance-triggered tender every three years for up to 100% of share capital. This would be triggered for the first time at the start of May 2028 if the portfolio fails to beat the Russell 1000 Value Index.
The proposals come in response to repeated underperformance at BRAI, at a time when there is increasing scrutiny on what boards are doing to address discounts and shareholder concerns, including from activists like Saba.
Stablemate BlackRock Energy and Resources Income (BERI ) last month proactively introduced a continuation vote in response to its own persistent ‘disappointing’ discount.
Deutsche Numis analyst Ewan Lovett-Turner cautioned that BlackRock American Income would still face an uncertain future after the revamp.
He said: ‘Given the weak performance record and approaching continuation vote it is not a huge surprise to see meaningful changes made by the board, although the company remains small, at £143m market cap, which is likely to put it below the radar of many investors and the commitment to hold tenders, and a full exit if assets fall below £125m still leaves its future in doubt.’
The board of BlackRock American Income recognised its poor performance relative to the Russell 1000 Value Index but chair Alice Ryder expressed optimism about the new approach.
‘The introduction of a systematic investment strategy is an exciting and truly innovative development for BRAI,’ she said.
‘It combines the power of big data and AI, with the best elements of a UK investment company: the ability to enhance the dividend distribution and use gearing, and the presence of an independent board of directors.
‘Alongside a substantially reduced management fee and an increased yield, we believe this new strategy will be attractive to investors who desire access to undervalued US companies at a time when valuations in the market as a whole remain stretched.’
In the five years to the end of 2024, the underlying portfolio returned 52.4%, while shareholders saw a weaker 38.3% total return, according to the latest factsheet. That was well behind the Russell 1000 Value benchmark’s 72% gain.
