Last month shareholders of what used to be known as British Assets Trust voted overwhelmingly in favour of a radical change of investment strategy for the investment trust, which was consequently renamed BlackRock Income Strategies Trust (BIST). This followed the announcement last year that BlackRock would take over as manager after the trust had underperformed its hybrid benchmark over one, three and five years, as well as its peer sector average over three and five years.
Since 27 February this year the trust has been managed by Adam Ryan and his team at BlackRock, and they are changing it from being a global equities fund to a multi-asset fund. They will seek to preserve capital in real terms and to grow the dividend over the medium term at least in line with inflation, targeting a total portfolio return of UK consumer price index (CPI) inflation plus 4 per cent a year, over a five- to seven-year cycle.
The trust will invest around 40 per cent of its portfolio in UK equity income stocks, and 60 per cent in assets, including developed and emerging markets equities, high-yield loans, government bonds and commodities.
Mr Ryan has begun reducing the UK equity allocation. "With the FTSE recently hitting 7000 it is a good time to do this and introduce some themes that we have in our other funds," he says. "This process should take until around the end of March."
He has reallocated 2 per cent of assets into Indian equities via an exchange traded fund (ETF) - Lyxor ETF MSCI India (INRL). "This has adequate liquidity and provides the market exposure we desired," says Mr Ryan. "It is a tactical opportunity designed to generate total returns for the portfolio. The election in India has been a game-changer in terms of structural reform. Unlike many other emerging markets India can, for example, put up interest rates - Modi's programme of reforms are genuine. India is also a major beneficiary from the oil price fall - this is worth up to 1 per cent of gross domestic product (GDP) growth. India is one of the few bright spots among emerging markets."
He has also put nearly 2 per cent of assets into Brazilian inflation-linked government bonds, which offer a 6 per cent yield. "The yields look attractive relative to other segments of the fixed-income complex," he explains. "This is a medium-term holding. We think that the country will benefit from a central bank determined to repair the credibility of the government and more market friendly policies. We elected to hold inflation-linked bonds due to some risk of rising inflation on the back of foreign exchange moves going forward."
Mr Ryan also likes Europe. "There has been a decent level of earnings growth on equities, and in Europe this has not been seen for some time," he says. "We started to buy Europe in our other funds, but it has had a very strong start and we don't want to buy it before profit-taking comes in. Rather, if there is profit-taking we will use that as an opportunity to add. We are nervous about buying markets that have done phenomenally well in the short term."
Mr Ryan and his team have built a basket of shares to get exposure to Europe. "Active funds have lots of exposure to exporters to Asia, but I wanted to play the domestic theme," he explains. "Single-country ETFs are also not suitable as, for example, Italy and Spain have large sector exposure to areas such as telecoms. We have a basket of 26 shares, of which the defining feature is that they must generate 75 per cent-plus of their revenues from Europe."
Examples of shares in the basket include car producer Peugeot (UG:PAR), glasses maker Luxottica (LUX:MIL) and Ryanair (RY4B:ISE). "These have a real focus on domestic revenues within Europe," says Mr Ryan. "But we are waiting for a pullback before we add the basket holdings to BlackRock Income Strategies Trust."
He will otherwise not add to direct share holdings outside the UK as in this area he will largely use ETFs and options to get exposure. "We are not stockpickers, we think of the world from a macro, top-down perspective," he explains.
Adam Ryan CV Adam Ryan is manager of BlackRock Income Strategies Trust and BlackRock Dynamic Diversified Growth Fund (GB00B1577C37), and a member of the company's multi-asset strategies group. He has worked at BlackRock since 1999 including his years with Merrill Lynch Investment Managers. His other positions include head of fixed income for Merrill Lynch Investment Managers' private client business. Mr Ryan has a BA degree with honours in engineering from Cambridge university. |
BlackRock Income Strategies will be able to invest up to 15 per cent of its assets in alternative areas. The move into these will take place over 12 to 18 months because Mr Ryan is waiting for the trust to complete a tender offer. "We want to make sure that investors are in for the long haul and, once we are confident of that, we can start to look at illiquid alternatives," he explains.
The tender offer will take place within six months of February's annual general meeting, and it is hoped that this will help bring in the discount to net asset value, which is about 5.5 per cent. The trust's managers hope this can be as tight as 2 per cent.
The alternative assets will include areas such as direct lending and this will be sourced internally from BlackRock.
"BlackRock has been building a platform for direct lending to small and medium businesses, and mortgage origination," says Mr Ryan. "It already has infrastructure and real estate debt globally. It will charge one fee for the management, which is much cheaper than resorting to third parties. This will help us maintain the trust's existing fee."
The trust pays its manager a fee of 0.4 per cent on the value of its total assets less current liabilities.
Mr Ryan says the biggest challenge in running an investment trust trying to maintain and grow a yield of 4-4.45 per cent is interest rates at around 0 per cent across the board. "It will not be easy to grow the dividend in the short term, but we already have a very strong revenue reserve of 1.7 years, giving us the income bias that we will continue to focus on, and we are not forced to own any particular asset class," he says. "So, for example, we will have no exposure to high-yield bonds as we are concerned about the lack of liquidity. We don't anticipate a pick-up in defaults, but high-yield funds may struggle to meet redemptions."
