North America investment trusts have performed strongly in the past year, returning 24 per cent compared to the wider industry average of 11 per cent, according to the Association of Investment Companies (AIC). However, the sector has also experienced a derating: the average discount to net asset value (NAV) hit double digits for the first time in six years, sinking to 10 per cent as at 30 September.
- Improved performance since manager change
- Discount to NAV
- US dollar exposure
- May benefit from US rate rise
- Political uncertainty
- Short-term record
Examples include North American Income Trust (NAIT) which, since a manager change in June 2015, has experienced a notable improvement in its performance. This trust has generated a share price return of 43 per cent beating its benchmark, the S&P 500 Index's 37 per cent over the year, and the average return for North American income trusts of 41 per cent. The trust is now among the top performers in its sector over the period and has a decent yield of 3.2 per cent.
And its discount to NAV of 10.2 per cent makes it a potentially good time to buy the trust because if it sustains its outperformance the discount could tighten.
Gaining exposure to the US market may also benefit UK investors as the continuing weakness in sterling enhances returns in overseas currencies, particularly the US dollar.
"North American Income Trust offers attractive exposure to US equities combined with a yield of [about] 3.1 per cent, which is around 1.5 times that of the index," say analysts at Winterflood who include the trust in their model portfolio. "Performance against the S&P 500 has also improved over the past 18 months, although, given the fund's income bias, periods of out/underperformance against the index are to be expected."
The trust aims to generate above-average dividend income and capital growth, primarily from US and selected Canadian equities. It can also hold fixed income assets, and write covered call or put options. The latter are used to supplement income and manage the portfolio in terms of exiting or adding to positions at target prices. Gearing of up to 20 per cent of net assets is permitted and up to 20 per cent of the portfolio may be covered by derivatives.
Ralph Bassett and Fran Radano have been co-managers of the trust since June 2015, following the departure of Paul Atkinson. They follow a quality and value stock selection approach, targeting cash-generative companies that are able to reinvest in their businesses, as well as paying sustainable dividends.
The portfolio has 45 equity positions and 10 bond holdings, with financials being the largest sector exposure. The managers have been reducing exposure to highly priced consumer staple stocks and increasing financials, as they think these look cheap. While low interest rates are not good news for financials, the managers believe that these companies will benefit from any rise in US interest rates and balance sheets in the sector look overcapitalised due to tougher regulation.
While the trust's one-year outperformance is strong, over three and five years it has failed to beat the S&P 500 Index.
But the underperformance of the benchmark was before the current management team took over.
And Mr Radano thinks whoever wins the US election, the environment will be more benign than the pre-election rhetoric suggests.
"Mudslinging and misquoting aside, the ultimate winner will unlikely have a mandate to push their platform through unilaterally, and as long-term investors there's a better chance that this is simply 'much ado about nothing'," he says. "Stepping back, the US economic engine remains resilient and has spewed out job growth this entire decade."
So if you want access to North America, an attractive income and the potential to beat the S&P 500 at a discount, then North American Income Trust's recent improvement in performance makes it worth consideration. Buy. EA
NORTH AMERICAN INCOME TRUST (NAIT) | |||
---|---|---|---|
Price | 1096p | Gearing exposure | 8% |
AIC Sector | North America | NAV | 1219.9p |
Fund Type | Investment trust | Discount to NAV | 10.2% |
Market Cap | £314m | Yield | 3.2% |
No of Holdings | *55 | Ongoing Charge | 1.03% |
Set up date | 5 June 1997 | More details | www.northamericanincome.co.uk |
Manager start date | Ralph Bassett: 30/06/2015; Fran Radano 29/05/2012 |
Source: Winterflood and Morningstar as at 24/10/16, *NAIT fact sheet as at 31/08/16.
Performance
1-year share price return (%) | 3-year cumulative share price return (%) | 5-year cumulative share price return (%) | |
North American Income Trust | 43 | 43 | 109 |
North American income trust average | 41 | 34 | 76 |
S&P 500 | 37 | 73 | 152 |
Source: Winterflood as at 24/10/16
Top 10 holdings (%) as at 31/08/16
Wells Fargo & Co | 4.2 |
---|---|
CME | 3.8 |
Dow Chemical | 3.8 |
Pfizer | 3.6 |
Microsoft | 3.6 |
Molson Coors Brewing | 3.3 |
Chevron | 3.1 |
Rockwell Automation | 3.0 |
Johnson & Johnson | 2.7 |
Verizon Communications | 2.7 |
Source: Aberdeen Asset Managers
Sector breakdown (%) as at 31/08/16
Financials | 23.9 |
---|---|
Information Technology | 12.8 |
Consumer Staples | 11.2 |
Materials | 9.1 |
Industrials | 8.6 |
Energy | 8.6 |
Consumer Discretionary | 8.4 |
Health Care | 8.0 |
Telecommunication Services | 5.8 |
Utilities | 3.6 |
Source: Aberdeen Asset Managers