BlackRock Sustainable American Income Trust — A unique fund focusing on value and sustainability

BlackRock Sustainable American Income Trust (LSE: BRSA)

Last close As at 17/05/2024

GBP2.06

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GBP159m

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BlackRock Sustainable American Income Trust — A unique fund focusing on value and sustainability

BlackRock Sustainable American Income Trust (BRSA) underwent a strategy change in July 2021, to incorporate explicit ESG objectives into its investment approach. Its three managers, Tony DeSpirito, David Zhao and Lisa Yang, aim to deliver an attractive level of income and long-term capital growth from a portfolio of attractively valued, dividend-paying companies, which have favourable ESG credentials either as leaders, improvers or ‘sustainability enablers’. While growth stocks have been favoured by investors for much of the last decade, data from BlackRock show that since 1978, in the one, two and three years following a recession, which is a possibility given the sharp rise in US interest rates, value stocks meaningfully outperformed growth stocks. Also, since 1984, following periods when the US Federal Reserve hiked interest rates, quality stocks led the US market in the subsequent one, two and three years.

Melanie Jenner

Written by

Mel Jenner

Director, Investment Trusts

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Investment Companies

BlackRock Sustainable American Income Trust

A unique fund focusing on value and sustainability

Investment trusts
American equities

20 November 2023

Price

185.3p

Market cap

£148m

Total assets

£159m

NAV*

198.9p

Discount to NAV

6.9%

*Including income. At 16 November 2023.

Yield

4.3%

Ordinary shares in issue

79.8m

Code/ISIN

BRSA/GB00B7W0XJ61

Primary exchange

LSE

AIC sector

North America

Financial year end

31 October

52-week high/low

210.0p

174.0p

NAV* high/low

220.2p

190.6p

*Including income.

Net cash*

0.3%

*At 30 September 2023.

Fund objective

BlackRock Sustainable American Income Trust (BRSA) aims to provide an attractive level of income and capital appreciation over the long term in a manner that is consistent with the trust’s principles of sustainable investing. Performance is measured against a US 1000 value index (the reference index).

Bull points

Fund offers exposure to a specialist US multi-cap value portfolio with an ESG focus.

Attractive dividend yield.

Value stocks tend to outperform during periods of rising inflation and interest rates.

Bear points

FY22 dividend was not fully covered by income.

Reference index is not ESG based.

US market is trading at a premium to global equities.

Analyst

Mel Jenner

+44 (0)20 3077 5700

BlackRock Sustainable American Income Trust is a research client of Edison Investment Research Limited

BlackRock Sustainable American Income Trust (BRSA) underwent a strategy change in July 2021, to incorporate explicit ESG objectives into its investment approach. Its three managers, Tony DeSpirito, David Zhao and Lisa Yang, aim to deliver an attractive level of income and long-term capital growth from a portfolio of attractively valued, dividend-paying companies, which have favourable ESG credentials either as leaders, improvers or ‘sustainability enablers’. While growth stocks have been favoured by investors for much of the last decade, data from BlackRock show that since 1978, in the one, two and three years following a recession, which is a possibility given the sharp rise in US interest rates, value stocks meaningfully outperformed growth stocks. Also, since 1984, following periods when the US Federal Reserve hiked interest rates, quality stocks led the US market in the subsequent one, two and three years.

S&P 500 Growth Index/S&P 500 Value Index (total return) over last decade

Source: Refinitiv, Edison Investment Research

Why consider BRSA?

Compared with its six peers in the AIC North America sector, BRSA has a unique focus on value and ESG. Given the managers’ focus on high-quality, reasonably priced, dividend-paying stocks, BRSA’s portfolio is relatively defensive. This is evidenced by the upside/downside capture analysis on page 2 and means the fund’s performance should be relatively resilient during periods of economic weakness and high stock market volatility.

The managers believe that the risk of a US recession has risen as inflation, although down from its peak, remains elevated and the impact of higher interest rates is yet to be felt in the US economy. Hence, they consider that robust 2024 consensus earnings estimates provide room for disappointment.

For investors seeking US equity exposure, BRSA may be worthy of consideration, especially if the consensus view of a soft US economic landing proves to be too optimistic. In an environment of higher-than-average investor risk aversion, the trust’s discount is wider than its historical averages. This provides scope for a higher valuation when sentiment improves or if BRSA’s relative performance gets back on track. In the meantime, the trust offers an attractive 4.3% dividend yield, as the policy is to pay out a regular annual distribution of 8.0c per share, using BRSA’s considerable reserves when required.

BRSA: A combination of value and ESG factors

BRSA provides investors with a unique product, focusing on value and sustainability. The trust’s three managers are part of BlackRock’s income & value team, which has around $60bn of assets under management. It believes that, having been out of favour with investors, both value and sustainability strategies are poised for a comeback, with BRSA well positioned to capture this.

Manager Yang explains that while the trust underwent a strategy change in July 2021, there are certain elements that remain constant. These include the three managers operating in the same BlackRock investment team and having a continued focus on dividend-paying US stocks, seeking to generate an attractive level of income plus long-term capital growth. An additional focus on sustainability means the fund has a premium ESG score and lower carbon emissions than the US value 1000 reference index. The change in strategy also involved a move from a large-cap to a multi-cap approach, although the managers are finding it difficult to find small-cap companies that fit their investment criteria. They are keen to avoid ‘value traps’, which are firms that look attractive but whose businesses are challenged and are unlikely to achieve a higher valuation.

BRSA’s upside/downside capture

Exhibit 1 shows BRSA’s upside/downside capture over the last 10 years. The fund’s defensive qualities are illustrated by its upside capture of 93.6% and downside capture of 94.5%. These numbers suggest that the trust will capture around 5% less than the reference index’s moves both in months when share prices rally and in months when they fall.

Exhibit 1: BRSA’s upside/downside capture

Source: Refinitiv, Edison Investment Research. Note: Cumulative upside/downside capture calculated as the geometric average NAV total return (TR) of the fund during months with positive/negative reference index TRs, divided by the geometric average reference index TR during these months. A 100% upside/downside indicates that the fund's TR was in line with the reference index’s during months with positive/negative returns. Data points for the initial 12 months have been omitted in the exhibit due to the limited number of observations used to calculate the cumulative upside/downside capture ratios.

Market performance and valuation

As shown in Exhibit 2, in aggregate, US shares have delivered a significantly better performance than the UK market over the past decade. In addition, it is interesting to note how much value shares have lagged the broader US market. In recent years, except in 2022, growing technology companies have made a major contribution to the US market (Exhibit 3), with the sector now making up around 28% of the S&P 500. With its focus on value stocks, BRSA’s absolute performance has suffered from a lack of exposure to large-cap US technology companies.

Exhibit 2: Performance of indices over the last decade (£)

Source: Refinitiv, Edison Investment Research

Exhibit 3: S&P 500 Index sector total returns ($)

%

2023*

2022

2021

2020

Comm'n services

37.9

Energy

65.4

Energy

54.4

IT

43.9

IT

34.7

Utilities

1.6

Real estate

46.1

Cons discretionary

33.3

Cons discretionary

20.9

Consumer staples

(0.6)

Financials

34.9

Comm'n services

23.6

Industrials

1.5

Healthcare

(2.0)

IT

34.5

Materials

20.7

Energy

(0.3)

Industrials

(5.5)

Materials

27.3

Healthcare

13.5

Materials

(0.7)

Financials

(10.6)

Healthcare

26.1

Industrials

11.1

Financials

(4.1)

Materials

(12.3)

Cons discretionary

24.4

Consumer staples

10.8

Consumer staples

(5.9)

Real estate

(26.2)

Comm'n services

21.6

Utilities

0.5

Healthcare

(7.2)

IT

(28.2)

Industrials

21.1

Financials

(1.8)

Real estate

(8.2)

Cons discretionary

(37.0)

Consumer staples

18.6

Real estate

(2.2)

Utilities

(13.3)

Comm'n services

(39.9)

Utilities

17.7

Energy

(33.7)

Total

10.7

Total

(18.1)

Total

28.7

Total

18.4

Source: Bloomberg. Note: *To 31 October 2023.

As shown in Exhibit 4, US shares do not appear attractively valued. Looking at Datastream indices, the US is trading at a near 25% premium to the world market on a forward P/E basis, and its 18.7x multiple is at a premium to its 10-year average. In contrast, global equities are trading around a 3% discount to their average over the last decade. The price-to-book valuation differentials between the US and global markets are even wider in both absolute and relative terms. While the US market generates a superior return on equity, it offers a lower dividend yield.

Exhibit 4: Valuation metrics of Datastream indices (at 16 November 2023)

Last

High

Low

10-year average

Last as % of average

US

P/E 12 months forward (x)

18.7

23.4

14.1

18.1

104

Price to book (x)

4.2

4.6

2.3

3.2

130

Dividend yield (%)

1.5

2.7

1.2

1.9

82

Return on equity (%)

15.9

18.5

10.0

14.1

113

World

P/E 12 months forward (x)

15.2

19.9

12.5

15.6

97

Price to book (x)

2.3

2.5

1.5

2.0

117

Dividend yield (%)

2.4

3.4

1.8

2.4

98

Return on equity (%)

12.6

14.0

7.4

11.2

113

Source: Refinitiv, Edison Investment Research

The managers’ view on the investment backdrop

Yang explains that she and her colleagues are taking a cautious view within BRSA’s portfolio, as although inflation is moderating, it remains elevated. The US has undergone one of the fastest interest rates tightening cycles in its history, which means there is a risk of a recession even though the consensus view is for a soft economic landing. Yang says a recession is seen as the base case, as it takes time for higher interest rates to play out.

While the manager considers that the S&P 500 Index’s valuation looks unattractive (on a P/E multiple basis it is trading at one standard deviation above its long-term average), she sees considerable value in the US 1000 value index, which is trading at one of the largest discounts to the S&P 500 Index over the last decade. The managers are particularly finding good opportunities in quality stocks, including some healthcare names.

While, according to Yang, there is a high probability of a recession, which is implied by the shape of the US yield curve, she does not believe it is priced into the US stock market. Core inflation has come down from the 2022 highs, but it is still much higher than between 2010 and 2020. US unemployment remains very low, which is placing upward pressure on inflation, making it difficult for the Federal Reserve to contain inflation. The manager explains that the US money supply turned negative at the end of 2021 and, coupled with a sharp increase in the federal funds rate, means financial conditions are very tight. Hence, she is concerned about corporate earnings. Yang highlights that there have been 10 US recessions since 1957, and earnings typically declined by 13% from peak to trough; however, they declined by 18% in the last three recessions. Consensus earnings growth forecasts are +12% for 2024, so the manager believes there is downside risk to these estimates.

As it is hard to time a recession, Yang considers that it is better to stay invested. Looking at how equities have performed after a recession, value stocks outperformed growth stocks and the broader market, while quality stocks outperformed equities and bonds following interest rate hiking cycles. The manager notes that valuation spreads are very wide. The least expensive quintile of US stocks is trading at two standard deviations below its long-term average, providing opportunities for value managers, and while quality stocks have re-rated since their 2022 low valuations, they remain below their long-term averages.

Current portfolio positioning

BRSA’s geographic exposure is shown in Exhibit 5. Over the 12 months to end-September 2023 the largest changes were a 5.9pp higher US allocation, and a 3.4pp lower UK weighting, while the Swiss exposure was sold (-1.0pp). Around 13% of the portfolio was held in non-North American companies.

Exhibit 5: Portfolio geographic exposure (% unless stated)

Portfolio end-September 2023

Portfolio end-September 2022

Change (pp)

US

85.8

79.8

5.9

UK

4.7

8.1

(3.4)

Japan

3.6

3.8

(0.1)

France

2.2

2.9

(0.7)

Australia

1.8

2.1

(0.3)

Canada

1.3

1.9

(0.6)

Denmark

0.6

0.5

0.1

Switzerland

0.0

1.0

(1.0)

100.0

100.0

Source: BRSA, Edison Investment Research. Note: Rebased for net current assets/liabilities.

BRSA’s managers are finding mispriced opportunities in some overseas stocks. As examples: global oil and gas companies have free cash flow yields that are double those of similar US businesses; international personal care stocks are significantly less expensive than those in the US; and European pharma stocks have better growth outlooks and less patent risk than US pharma stocks, yet they trade at a discount to their US peers.

Considering BRSA’s sector exposure (Exhibit 6) over the 12 months to end-September 2023, there was a 2.9pp higher weighting to industrials, with a 2.3pp lower allocation to financial stocks. Versus the reference index, the notable active weights were overweight positions in IT (+6.7pp) and healthcare (+4.2pp) with underweight exposures to industrials (-6.6pp) and real estate (-3.5pp). One of the reasons for the overweight IT position is that many companies have steady demand for their products, similar to consumer staples businesses. The healthcare sector offers good growth opportunities, and its earnings in a downturn are more resilient than other defensive sectors such as consumer staples (which are more expensive) or utilities (which have weaker fundamentals). Industrials is viewed as a late-cycle sector and, in general, company valuations are unappealing. Many real estate companies have leveraged business models, meaning they can underperform in a rising interest rate environment. Also, these firms’ shares tend to move as a group, providing less opportunities for stock picking.

Exhibit 6: Portfolio sector exposure versus reference index (% unless stated)

Portfolio end-Sept 2023

Portfolio end-Sept 2022

Change
(pp)

Active weight vs index (pp)

Financials

19.4

21.6

(2.3)

0.2

Healthcare

18.9

20.0

(1.1)

4.2

Information technology

14.3

13.5

0.8

6.7

Consumer discretionary

10.6

9.6

1.0

1.7

Energy

9.2

8.6

0.6

0.0

Industrials

8.5

5.6

2.9

(6.6)

Consumer staples

6.4

5.1

1.3

(1.3)

Communication services

4.0

4.9

(0.9)

(0.1)

Utilities

3.7

4.4

(0.7)

(1.4)

Materials

3.7

5.3

(1.6)

0.2

Real estate

1.2

1.2

0.0

(3.5)

100.0

100.0

Source: BRSA, Edison Investment Research. Note: Rebased for net current assets/liabilities.

Exhibit 7: BRSA’s sector exposure versus its reference index at end-September 2023

Source: BRSA, Edison Investment Research. Note: Numbers subject to rounding.

At end-September 2023, BRSA’s largest 10 holdings made up 26.6% of the portfolio, which was a modestly lower concentration compared with 28.0% 12 months earlier; four positions were common to both periods.

Exhibit 8: Top 10 holdings (at 30 September 2023)

Company

Country

Sector

Portfolio weight %

30 September 2023

30 September 2022*

Shell

UK

Energy

3.1

N/A

Cisco Systems

US

Information technology

2.9

3.0

Citigroup

US

Financials

2.7

N/A

American International Group

US

Financials

2.7

N/A

Kraft Heinz

US

Consumer staples

2.6

N/A

Willis Towers Watson

US

Financials

2.6

2.9

Cigna

US

Healthcare

2.6

2.7

L3Harris Technologies

US

Industrials

2.5

N/A

Cognizant Technology Solutions

US

Information technology

2.5

2.6

Cardinal Health

US

Healthcare

2.4

N/A

Top 10 (% of portfolio)

26.6

28.0

Source: BRSA, Edison Investment Research. Note: *N/A where not in end-September 2022 top 10.

Comparing BRSA’s portfolio with the reference index at end-August 2023, it had a modestly higher gross dividend yield and considerably higher dividend growth. Its return on equity was broadly in line. Looking at earnings, the portfolio’s forward growth estimate was lower than the reference index, but it was more attractively valued at a c 20% forward P/E multiple discount.

Exhibit 9: Portfolio characteristics at 31 August 2023

Portfolio

Reference index

Difference (%)

Number of holdings

59

846

(93.0)

Gross dividend yield (%)

2.5

2.3

0.2

Dividend growth (5Y annualised, %)

9.1

5.1

4.0

Return on equity (%)

13.2

13.0

0.2

Forward EPS growth (%)

10.8

15.8

(5.0)

Forward P/E multiple (x)

12.1

15.2

(20.4)

Source: BRSA, Edison Investment Research

Recent portfolio transactions

There were two new positions added to the portfolio in September 2023, CNH Industrial (manufacturer of agricultural machinery and construction equipment) and NextEra Energy (electric utility holding company), while AstraZeneca (major pharma firm) was sold. In August 2023, the managers initiated positions in Allegion (security products provider), Crown Holdings (manufacturer of metal cans, containers and packaging) and Dollar General (discount retailer), while the holdings in CACI International (professional services and IT company), EQT (energy exploration and pipeline firm) and Ralph Lauren (apparel company) were sold. During July 2023, Crown Castle (communications infrastructure provider), International Flavors & Fragrances (producer of flavours, fragrances and cosmetic actives) and Unilever (UK multinational consumer packaged goods company) were added to the portfolio, and CBRE Group (commercial real estate services and investment firm), PPG Industries (supplier of paints, coatings and speciality materials) and Charles Schwab (multinational financial services company) exited the fund. There were no new holdings or complete sales in June 2023.

Performance: Working hard to make up shortfall

BRSA is a member of the AIC North America sector, which is made up of five US and two Canadian funds, which can also have an allocation to US equities. The seven peers follow a range of mandates.

Exhibit 10: AIC North America sector at 16 November 2023*

% unless stated

Market cap £m

NAV TR
1 year

NAV TR
3 year

NAV TR
5 year

NAV TR
10 year

Discount
(cum-fair)

Ongoing charge

Perf.
fee

Net
gearing

Dividend
yield

BlackRock Sustainable American Income

147.9

(2.3)

29.6

41.7

156.1

(3.6)

1.0

No

100

4.3

Baillie Gifford US Growth

485.6

(1.0)

(22.4)

71.3

(17.2)

0.7

No

106

0.0

Canadian General Investments

422.8

1.0

31.2

82.7

174.1

(36.4)

1.4

No

113

2.8

JPMorgan American

1,495.4

11.7

43.1

87.5

289.2

(1.2)

0.4

No

102

0.9

Middlefield Canadian Income

104.1

(14.0)

34.8

34.5

70.3

(14.1)

1.3

No

122

5.3

North American Income Trust

369.9

(6.6)

29.0

24.2

147.0

(12.8)

0.9

No

109

4.2

Pershing Square Holdings

5,789.0

11.6

57.1

237.9

(35.3)

1.6

Yes

103

1.4

Simple average (7 funds)

1,259.3

0.0

28.9

82.8

167.4

(17.2)

1.0

108

2.7

BRSA rank in peer group

6

5

5

5

3

2

4

7

2

Source: Morningstar, Edison Investment Research. Note: *Performance at 15 November 2023 based on ex-par NAV. TR, total return. Net gearing is total assets less cash and equivalents as a percentage of net assets.

BRSA is differentiated from the other funds in its peer group by seeking an attractive total return from both capital growth and income from companies that have premium ESG scores and lower-than-average carbon emissions. The trust’s total returns are above average over the last three years. It ranks fifth over the last one, three and five years, and over the last decade, the trust ranks third out of five funds. BRSA has the second-highest valuation in the sector, an average ongoing charge, and is currently ungeared. The trust has an attractive dividend yield, which is 1.6pp above the sector average and ranks second.

Exhibit 11 shows BRSA’s relative returns; it has underperformed the reference index since the 2021 strategy change. Yang explains that this is due to discrete factors. ESG funds had performed well but have underperformed over the last two years; she does not expect this phenomenon to persist and anticipates that investors will once again return to focus on quality companies with good sustainability attributes. The manager notes that BRSA is outperforming compared with other ESG funds. She also highlights Meta Platforms (formerly known as Facebook), whose shares have performed very strongly but it does not fit with the trust’s strategy. It has a poor ESG rating of CCC, as measured by MSCI, operates a social media network that has fired a lot of its personnel, and the company does not pay a dividend, so does not fit BRSA’s income requirement.

Exhibit 11: Share price and NAV total return performance, relative to indices (%)

 

One month

Three months

Six months

One year

SC

Three years

Five years

Price relative to US 1000 value index

(2.0)

(3.8)

(7.4)

(3.3)

(5.8)

(5.0)

(11.7)

NAV relative to US 1000 value index

0.4

(0.4)

(0.5)

(0.6)

(1.6)

(3.3)

(5.9)

Price relative to S&P 500 Index

(3.4)

(5.3)

(12.5)

(12.1)

(8.2)

(5.4)

(27.9)

NAV relative to S&P 500 Index

(1.0)

(2.1)

(6.0)

(9.7)

(4.2)

(3.7)

(23.1)

Price relative to CBOE UK All Cos

(0.6)

(3.4)

(2.3)

(13.4)

(3.5)

(4.5)

5.7

NAV relative to CBOE UK All Cos

1.8

(0.1)

5.0

(11.0)

0.8

(2.8)

12.7

Source: Refinitiv, Edison Investment Research. Note: Data to end-October 2023. Geometric calculation. SC, since change in strategy on 30 July 2021.

Exhibit 12: Investment trust performance to 31 October 2023

Price, NAV and reference index total return performance, one-year rebased

Price, NAV and reference index total return performance (%)

Source: Refinitiv, Edison Investment Research. Note: Three- and five-year performance figures annualised. SC, since change in strategy on 30 July 2021.

Exhibit 13: Five-year discrete performance data

12 months ending

Share price
(%)

NAV
(%)

US 1000 value
(%)

S&P 500
(%)

CBOE UK All Cos (%)

31/10/19

15.0

8.5

9.8

12.9

6.9

31/10/20

(17.9)

(8.8)

(7.5)

9.8

(20.2)

31/10/21

42.4

35.9

35.6

34.8

36.0

31/10/22

3.6

7.4

10.7

1.7

(1.6)

31/10/23

(8.1)

(5.6)

(5.0)

4.5

6.1

Source: Refinitiv. Note: All % on a total return basis in pounds sterling.

Dividends: Use of distributable reserves

In FY22, BRSA’s earnings per share were 3.84p, which was a 5.4% decline compared with 4.06p per share in FY21. However, as the trust can no longer write covered call options, if earnings from these were excluded from the FY21 income, BRSA’s earnings would have been 29.7% higher year-on-year. In August 2022, BRSA’s share premium account was converted to distributable reserves, which at the end of FY22 totalled c £168.6m (equivalent to c 26x the annual dividend payment).

The annual dividend of 8.0p per share (four payments of 2.0p per share) has been held steady for the last six financial years; the board expects this trend to continue in FY24, by supplementing income with distributable reserves.

Exhibit 14: Dividend history since FY18

Source: BRSA, Edison Investment Research

Valuation: Highly rated versus its peers

Over the last three years, BRSA has broadly traded in a range of a 0% to 10% discount (Exhibit 15). Its latest 6.9% discount to cum-income NAV compares with a range of a 0.7% premium to a 10.2% discount over the last 12 months. It is wider than the 3.4% to 6.1% range of average discounts over the last one, three, five and 10 years. However, this is unsurprising as, generally, investment trust discounts are wider than average during a period of elevated investor risk aversion due to an uncertain macroeconomic backdrop. Looking at Exhibit 10, BRSA has a higher valuation than most of its peers in the AIC North America sector.

Renewed annually, the trust’s board has the authority to repurchase up to 14.99% and allot up to 10% of its share capital. There had been no share buybacks since November 2020 and no issuance since April 2021. However, considering the prevailing discount to NAV, on 20 October 2023, the board restarted buying back shares. At 17 November 2023, c 383k shares had been repurchased and held in treasury.

Exhibit 15: Discount over three years (%)

Exhibit 16: Buybacks and issuance

Source: Refinitiv, Edison Investment Research

Source: Morningstar, Edison Investment Research

Exhibit 15: Discount over three years (%)

Source: Refinitiv, Edison Investment Research

Exhibit 16: Buybacks and issuance

Source: Morningstar, Edison Investment Research

Fund profile: Focus on income and ESG

BRSA was launched on 24 October 2012 and is listed on the Premium Segment of the London Stock Exchange. It is managed by three of BlackRock’s US income & value investment team: Tony DeSpirito (CIO, US fundamental equities), David Zhao (co-director of research) and Lisa Yang (consumer discretionary/staples specialist). There are 20 analysts in the US income & value team, which has c $60bn of assets under management. BRSA’s managers primarily invest in a diversified portfolio of North American equities, focusing on large- and mid-cap companies that pay and grow their dividends. To mitigate risk, at the time of investment, a maximum 10% of gross assets may be invested in a single investment, a maximum 25% in non-North American companies and a maximum 35% in any one sector. The managers also take firms’ ESG characteristics into account, seeking to deliver a superior ESG outcome compared with the reference index in terms of a better ESG score and a lower carbon emissions intensity score. Foreign currency is not hedged as a matter of course, but the managers may employ specific currency hedging.

Investment process: ESG is an integral input

There are three main elements to BRSA’s investment process:

Idea generation – the managers aim to identify the best ESG and alpha opportunities from an investment universe primarily made up of North American large- and medium-cap equities, although up to 25% of the portfolio can be invested in liquid non-North American companies. ESG exclusion screens are used to narrow the investment universe. The managers are able to leverage the best fundamental and thematic ideas from BlackRock’s US income & value platform to generate a pipeline and prioritise the research agenda.

Fundamental research – this involves assessing the materiality of a firm’s ESG and sustainability factors and evaluating its important earnings drivers, along with engaging with company managements on business and ESG issues. A research document is prepared to illustrate the investment thesis and is discussed within the investment team. The managers evaluate how and over what time frame they expect their research insights to be reflected in a company’s share price.

Portfolio construction – the fund typically has 30–60 high-conviction positions. Gearing of up to 20% of NAV is permitted, but is likely to be in a 0–10% range, with 5% seen as a neutral level. There are clear buy and sell disciplines for both fundamental and ESG considerations. Portfolio risks and exposures are carefully monitored, with an emphasis on stock-specific risk. The fund is diversified by sector, industry and style factors.

How ESG is integrated into the investment process

DeSpirito, Zhao and Yang seek to build a high-conviction portfolio of attractively priced, high-quality dividend-paying companies that are classified as either:

ESG leaders – best-in-class businesses that effectively manage environmental, social and governance factors to benefit all stakeholders, such as Cisco Systems. These companies make up the majority of the portfolio;

ESG improvers – companies showing demonstratable progress on their ESG journey, where active engagement may lead to improving ESG practices and more sustainable outcomes, such as auto manufacturers; or

‘sustainability enablers’ – firms advancing the transition to sustainable solutions, such as companies contributing to greater energy efficiency and a lower carbon footprint. Health insurance companies are also included in this category as they enable people to access healthcare products and services.

Outright exclusions from the fund include businesses manufacturing controversial weapons or civilian firearms, fossil fuel miners (thermal coal and tar sands) and tobacco companies. BRSA’s resulting portfolio has a premium ESG score and lower carbon emissions intensity than the reference index, as measured by MSCI, which is a leading external ratings agency.

As shown in Exhibit 17, at 31 January 2023, compared with the reference index, BRSA’s portfolio had higher ESG scores in all three of the subsectors (environmental, social and governance), while its carbon emissions intensity was less than half that of the reference index.

Exhibit 17: Portfolio ESG characteristics at 31 January 2023

Portfolio

Reference index

Difference (%)

MSCI ESG score (adjusted)

7.20

6.29

14.5

MSCI environmental score

7.23

6.64

8.9

MSCI social score

5.10

4.87

4.7

MSCI governance score

6.05

5.66

6.9

Carbon emissions intensity (total capital)*

54.3

125.8

(56.9)

Source: BRSA, Edison Investment Research. Note: *Metric tons/$m total capital.

Gearing

Gearing of up to 20% of NAV is permitted but is typically in a range of 0–10%, with 5% deemed a neutral level. At end-September 2023, BRSA had a net cash position of 0.3%.

Fees and charges

BlackRock Investment Management (UK) is paid an annual management fee of 0.70% of BRSA’s NAV, which is allocated 75% to the capital account and 25% to the revenue account. In FY22, the trust’s ongoing charges were 1.01%, which was 5bp lower than 1.06% in FY21.

Capital structure

Exhibit 18: Major shareholders

Exhibit 19: Average daily volume

Source: Bloomberg. Note: At 31 October 2023.

Source: Refinitiv. Note: 12 months to 16 November 2023.

Exhibit 18: Major shareholders

Source: Bloomberg. Note: At 31 October 2023.

Exhibit 19: Average daily volume

Source: Refinitiv. Note: 12 months to 16 November 2023.

BRSA is a conventional investment trust with one class of share. There are 79.8m ordinary shares in issue plus another 20.5m held in treasury. At the end of FY22, 96.5% of the trust’s shares were held by banks or nominees (including retail investor platforms), which was very similar to 96.4% at the end of FY21. BRSA’s average daily trading volume over the last 12 months was c 125k shares.

The board

Exhibit 20: BRSA’s board of directors

Board member

Date of appointment

Remuneration in FY22

Shareholdings at end-FY22

Alice Ryder (chair since 1 Nov 2022)

12 June 2013

£29,000

9,047

Melanie Roberts

1 October 2019

£29,000

10,000

David Barron

22 March 2022

£17,800

5,000

Solomon Soquar

21 March 2023

£0

Nil

Source: BRSA

General disclaimer and copyright

This report has been commissioned by BlackRock Sustainable American Income Trust and prepared and issued by Edison, in consideration of a fee payable by BlackRock Sustainable American Income Trust. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

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Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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General disclaimer and copyright

This report has been commissioned by BlackRock Sustainable American Income Trust and prepared and issued by Edison, in consideration of a fee payable by BlackRock Sustainable American Income Trust. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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