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We pick two investment trusts to give your ISA or SIPP a flavour of North America
Thursday 27 Oct 2016 Author: Daniel Coatsworth

The US stock market continues to surge ahead despite uncertainty surrounding who will win the presidential election.

Two of the country’s main stock market indices have this year hit record highs – the S&P 500 and the Dow Jones Industrial Average. The economy is growing and the labour market is fairly strong.

There may be short-term jitters around the election result, but this major economy deserves a place in a diversified investment portfolio on a long-term basis.

UK-listed investment trusts are one of the easiest ways to obtain exposure to the US market. We think Aberdeen Asset Management’s The North American Income Trust (NAIT) and BlackRock North American Income Trust (BRNA) are good products to consider.

investment trusts

Not as expensive as you'd think

The S&P 500 has risen by 73% in the past five years. It has richly rewarded shareholders – but has all the easy money been made? We think not.

We also believe it is wrong to dismiss the market because it looks expensive on a price to earnings (PE) ratio.

‘The US market looks expensive versus other geographies because it has a high weighting of technology stocks. They always look expensive as companies are growing fast,’ says Premier Asset Management fund manager Jake Robbins. It is fair to say PE ratios aren’t necessarily the best way to value fast-growth stocks.

Fund managers love the banks

Economic recovery, the potential for higher interest rates and stronger balance sheets led many fund managers to increase exposure to the US banking sector.

‘The banks are well capitalised; it’s not like what it was (during the global financial crisis,’ says Fran Radano, who runs The North American Income Trust.

His portfolio includes American banking giant Wells Fargo (WFC:NYSE) and BB&T (BBT:NYSE), a regional bank in the south east and mid-Atlantic regions.

Radano says BB&T has fee income ‘well above peer levels’ which reduces its reliance on higher interest rates to drive earnings. ‘It has a strong, long standing management team with a well-diversified loan book.’

BlackRock North American Income has a big position in the banking sector, having recently added to its holdings in Bank of America (BAC:NYSE) and also being invested in Citigroup (C:NYSE).

Equity income darlings before the financial crisis struck, banks are now ‘at an interesting inflection point’, says Tony DeSpirito, co-manager of the BlackRock fund.

New York City skyline with urban skyscrapers at sunset, USA.

Not a classic dividend fund

Aberdeen’s Radano says The North American Income Trust is ‘not your classic dividend fund’ stuffed with utilities and telecoms stocks. ‘If you screen for high yield stocks, we don’t necessarily own them.’

The investment trust seems to favour value opportunities which also pay dividends. It says it will only invest in companies capable of generating cash and which is also reinvested into the business.

It bought jeweller Tiffany & Co (TIF:NYSE) in the ‘mid $60’s’ and the stock now trades at $73.09. The shares have been volatile over the past year, yet the manager saw an opportunity buy cheaply with a view that trading problems would only be temporary.

‘This is a classic durable brand that we know will still be around in 50 years’ time,’ says Radano.

‘In a strengthening dollar environment, tourism takes a hit with the currency rate, so Tiffany’s product has been less attractive from a price perspective. There’s also been talk of millennials less interest in big purchases and more interested in experiences. Furthermore, China has clamped down on the culture of buying expensive gifts.’

The fund manager says Tiffany’s remains cash generative and took comfort that the management feel confident about cash flows. ‘The dividend is a healthy 3%; historically it has only been 2% to 2.5%.’

He adds: ‘There’s only a few times a decade you have the opportunity to buy this stock cheap.’

Better than the market

BlackRock North American Income Trust and The North American Income Trust tend to yield in the range of 2.8% to 3%. Although less than you’d expect from a UK equity income fund, they are generous in comparison to the 2.1% you’d currently get from the S&P 500 index.

BlackRock uses covered call options as a way of enhancing its yield. ‘The options portion of the portfolio since inception has been between 10-18%,’ explains DeSpirito, ‘and serves two key roles within the strategy for clients.

‘First, it increases the income generated by the trust. The options contributed around 45% of the trust's income, assisting in the delivery of the 4.3p total dividend.' DeSpirito also explains the options ‘dampen volatility within the trust, helping to ensure that in market drawdowns we are doing our best to protect shareholders’ capital.’

Superior criteria

Strategically, the BlackRock investment trust classifies itself as both an equity dividend fund and dividend growth fund.

DeSpirito seeks out superior dividend growers with a superior return on equity. He looks for high quality franchises with wide economic moats, companies that generate a good return on invested capital and have strong balance sheets to see them through volatile times.

He also seeks companies with improving earnings and cash flow trends and stresses ‘we want these characteristics at a good price’.

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