BlackRock Income needs to ‘address’ its small size

JPMorgan Cazenove, broker to BlackRock Income and Growth, calls on £38m investment trust to do something about its lack of scale which is discouraging investors.

BlackRock Income and Growth (BRIG ), one of the smallest investment trusts in the UK Equity Income sector, is under pressure from its own broker, JPMorgan Cazenove, to consider its future after a recent widening in its share price discount.

After last year saw an upsurge in mergers of small and illiquid trusts, with eight either having combined with a rival or announced plans to do so, analysts at JPMorgan Cazenove hinted that BRIG, with a market value of just £38m and shares trading nearly 15% below asset value, should follow suit.

Responding to annual results showing the portfolio run by BlackRock fund managers Adam Avigdori and David Goldman slightly underperformed the FTSE All-Share with an investment return of 5.2% in the year to 31 October, analysts Christopher Brown and Adam Kelly said ‘we think the small size is a challenge the board should address’.

Although the £44m, 4%-yielding portfolio has outperformed its peer group over five years, with a 41% total return on net assets against a sector average of 39.8%, and boasts strong revenue reserves to support the currently uncovered dividend, the analysts said the trust’s small size meant BRIG fell ‘below the radar’ of most wealth management firms. It was also not the top pick for DIY investors with stock brokers Hargreaves Lansdown, Interactive Investor and AJ Bell, they said.

The £11.2bn UK Equity Income sector houses some big trusts such as City of London (CTY ), the £2bn Janus Henderson flagship, and the £1bn Law Debenture (LWDB ). Their shares trade close to ‘par’, or NAV, a sign of good investor demand. 

While the trust had ‘shareholder friendly’ fees based on market capitalisation rather than net asset value (NAV), its level of annual ongoing charges was more than double the 0.59% sector average, reflecting the impact of fixed costs over its small pool of assets. Ongoing charges rose to 1.28% from 1.18% as the company shrank in response to £1m of share buybacks, the annual results showed.

The repurchase and cancellation of 568,428 shares during the financial year is part of a long-standing discount control policy by the board chaired by Graeme Proudfoot. However, while buybacks have boosted shareholder returns they have failed to increase demand for the stock.

In their note on 22 December, the analysts noted that BRIG’s discount to NAV had widened to 14.7%, close to a five-year low. Although the gap to NAV narrowed slightly to 13.7% over the Christmas break, it remained an outlier among UK equity income trusts trading at an average 4.2% below NAV.

‘A good run of continued, sustained relative NAV outperformance versus peers and the index could help the shares rerate, but we think the small size is a challenge the board should address,’ said the analysts in what could be an attempt to nudge the board into a strategic review that might lead to a wind-down or merger with another trust. The presence of the discount prevents the company from issuing new shares to bring in new investors.

Whether the board is minded to bring to an end a closed-end fund launched 22 years ago is unclear as efforts are underway to find a replacement for non-director Win Robbins, who is standing down after three years.

Any decision on BRIG’s future will require the support of Charles Worsley, a farmer in West Sussex whose family own 19% of the shares. He has been a non-executive director of the trust since 2010.


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