BlackRock Sustainable American Income Trust plc (LON:BRSA) has announced its final results for the year ended 31 October 2022.
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PERFORMANCE RECORD
| As at 31 October 2022 | As at 31 October 2021 | |
| Net assets (£’000)1 | 171,086 | 165,334 |
| Net asset value per ordinary share (pence) | 213.25 | 206.08 |
| Ordinary share price (mid-market) (pence) | 197.50 | 198.25 |
| Discount to cum income net asset value2 | 7.4% | 3.8% |
| Russell 1000 Value Index3 | 1824.64 | 1647.89 |
| —————- | —————- | |
| Performance (with dividends reinvested) | ||
| Net asset value per share2 | 7.4% | 36.0% |
| Ordinary share price2 | 3.6% | 42.4% |
| Russell 1000 Value Index | 10.7% | 35.6% |
| ========== | ========== | |
| Performance since inception (with dividends reinvested) | ||
| Net asset value per share2 | 216.3% | 194.4% |
| Ordinary share price2 | 191.4% | 181.4% |
| Russell 1000 Value Index | 269.2% | 233.4% |
| ========== | ========== |
| Year ended 31 October 2022 | Year ended 31 October 2021 | Change % | |
| Revenue | |||
| Net profit after taxation (£’000) | 3,081 | 3,248 | -5.1 |
| Revenue earnings per ordinary share (pence)3 | 3.84 | 4.06 | -5.4 |
| —————- | —————- | —————- | |
| Interim dividends (pence) | |||
| 1st interim | 2.00 | 2.00 | – |
| 2nd interim | 2.00 | 2.00 | – |
| 3rd interim | 2.00 | 2.00 | – |
| 4th interim | 2.00 | 2.00 | – |
| Total dividends paid/payable | 8.00 | 8.00 | – |
| ========== | ========== | ========== |
1 The change in net assets reflects portfolio movements and dividends paid during the year.
2 Alternative Performance Measures, see Glossary in the Company’s Annual Report for the year ended 31 October 2022.
3 Further details are given in the Glossary in the Company’s Annual Report for the year ended 31 October 2022.
Sources: BlackRock and Datastream.
Performance figures have been calculated in Sterling terms with dividends reinvested.
CHAIR’S STATEMENT
This is my first year as Chair of your Company and I am delighted to present the Annual Report to shareholders for the year ended 31 October 2022.
Market overview
The period under review has proved highly volatile, with economic uncertainty peaking in the first half of 2022 and remaining high. Equity markets initially appeared to be driven by concerns around high inflation and the response by the Federal Reserve (the Fed). However, they then sold off heavily following Russia’s invasion of Ukraine, as the market was quick to price in potential commodity and food disruptions resulting from the conflict. China’s continuing zero tolerance approach to COVID-19 and subsequent lockdowns has also made it harder to predict global economic trends, contributing to market volatility.
The U.S. economy and stock market struggled as it faced a multi-decade high in inflation and aggressive monetary tightening by the Fed. Following the start of the COVID-19 pandemic in March 2020, the U.S. economy greatly benefited from the Fed’s supportive fiscal and monetary policy which bolstered savings and supercharged asset prices, but with that liquidity drying up and the hikes in interest rates, the risk of recession is growing.
Compared to the wider US market, the Company has benefited from two particular market developments during the year. First, the increase in interest rates (and rise in the discount rate used to value future earnings growth) has meant that value stocks have had a resurgence in performance compared to growth stocks which has favoured our Investment Manager’s style of investing. Secondly, the strength of the US Dollar compared to Sterling and other currencies over the period has meant that returns have been positive in absolute terms for Sterling-based investors.
Performance
Against this backdrop and over the year to 31 October 2022, the Company’s net asset value per share (NAV) returned 7.4%1 and the share price returned 3.6%1. This compares with a rise of 10.7%1 in the Russell 1000 Value Index, the Company’s reference index. September and October 2022 were two of the toughest months for the Company since the change in strategy at the end of July 2021, as the value style underperformed and the Company faced a combination of headwinds including the outperformance of uninvestable sectors (such as aerospace, defence and tobacco), portfolio gearing and poor sector allocation and stock selection in medical technology, consumer discretionary and financials. It is worth noting that the wider market as measured by the S&P 500 Index reached bear market territory in mid-June (a drop of 20% or more from a previous peak) and then finished the year to 31 October 2022 down by 1.7% in Sterling terms.
At the close of business on 23 January 2023, the Company’s NAV had increased by 0.7% compared to a decrease of 1.4% in the reference index (both in Sterling terms with dividends reinvested) since the year end.
Revenue earnings and dividends
The Company’s revenue earnings per share (EPS), based on the weighted average number of shares in issue for the year, amounted to 3.84p (2021: 4.06p), a decrease of 5.4%. As the Company stopped writing option contracts since 31 July 2021, the Company’s revenue EPS has increased on a like-to-like basis by 29.7% after excluding the impact of option premium income earned in the year ended 31 October 2021. Four quarterly interim dividends of 2.00p per share were paid on 29 April 2022, 1 July 2022, 3 October 2022 and 3 January 2023. This is in line with the payments made in the previous financial year. The dividend paid represents a yield of 4.1% on the share price at the year end.
Your Board considers that it remains appropriate to continue with the current dividend policy for the new financial year, which will be supported through both revenue and other distributable reserves. The Company’s distributable reserves at 31 October 2022 were £168.6 million. The Board sought shareholder authority at the previous Annual General Meeting to cancel the Company’s share premium account, effectively converting it into a distributable reserve, and this became effective in August 2022. The Board continues to believe that this dividend policy provides an attractive option for current and prospective shareholders who wish to achieve exposure to the U.S. equity market, whilst at the same time receiving a competitive dividend.
Discount/premium
The Directors recognise the importance to investors that the market price of the Company’s shares should not trade at a significant premium or discount to the underlying NAV. Accordingly, in normal market conditions, the Board may use the Company’s share buy back and share issuance powers to ensure that the share price does not go to an excessive discount or premium.
Over the year to 31 October 2022, the Company’s shares have traded at an average discount of 5.3%. The Board considered that the market volatility caused by the geo-political issues referred to above and the associated sell-off of equities has given rise to the discount and therefore it was not in shareholders’ interests to buy back shares at this point in the cycle. Consequently, no shares were bought back during the year under review and up to the date of this report. Neither were any shares reissued during the same period. Resolutions to renew the authorities to issue and buy back shares will be put to shareholders at the forthcoming Annual General Meeting.
Board composition
As previously announced in last year’s Annual Report and Half Yearly Financial Report, Simon Miller retired as Chairman at the end of the Company’s financial year on 31 October 2022. On behalf of the Board and shareholders, I would like to thank Simon for his outstanding contribution as Chairman of the Company since its inception.
Christopher Casey has also informed the Board of his intention to retire as a Director of the Company following the Annual General Meeting in March 2023 and, accordingly, will not be seeking re-election. The Board would like to express its strong appreciation for Christopher’s wise counsel and invaluable contribution to the Company since its formation in 2012. The Board has commenced a search and selection process to identify a new Director and a further announcement will be made in due course.
The Board was pleased to appoint David Barron as a new non-executive Director with effect from 22 March 2022 and it is the intention that David, a chartered accountant, will replace Mr Casey as Audit and Management Engagement Chairman. Upon Mr Miller’s retirement and my appointment as Chair effective from 1 November 2022, I retired from the role as the Company’s Senior Independent Director and Mr Barron replaced me and also became Chairman of the Nomination Committee.
Outlook
High inflation and tighter monetary policy are two important reasons why the world economy is slowing down. Since recognising the urgent need for policy tightening to combat inflationary pressures, the Fed has raised interest rates at the fastest pace in more than three decades. Most other major developed market central banks have followed suit and the scale and speed of subsequent rate rises have surprised markets.
A resilient labour market in the U.S. and excess savings have so far protected the economy from a more severe slowdown, but have given rise to more persistent inflationary trends and sustained pressure on the Fed to continue to tighten fiscal policy. In turn, higher financing costs and declining real disposable income (driven by fiscal normalisation and high inflation) will be a headwind for the economy. The odds have now shifted towards a recession in 2023, driven by a Fed that is laser focused on bringing down inflation. While inflation has peaked, it is coming down slowly and is still well above the Fed’s 2% inflation target.
It has been a difficult decade for the ‘value’ approach to investing but one of the defining characteristics of financial markets in 2022, aside from the volatility, has been the rotation from high growth stocks to ‘value’ areas of the market. Historically, value has tended to do best in periods of higher and rising rates and higher and rising inflation, so this is likely to continue to be supportive of our Portfolio Managers’ value investing approach in the near term.
Annual General Meeting (AGM)
The AGM of the Company will be held at the offices of BlackRock at 12 Throgmorton Avenue, London EC2N 2DL on Tuesday, 21 March 2023 at 12 noon. Details of the business of the meeting are set out in the Notice of Annual General Meeting in the Company’s Annual Report for the year ended 31 October 2022.
Shareholders who intend to attend the AGM should ensure that they have read and understood the venue requirements for entry to the AGM. These requirements, along with further information on the arrangements for the AGM, can be found in the Directors’ Report in the Company’s Annual Report for the year ended 31 October 2022. In the absence of any reimposition of COVID-19 restrictions, the Board very much looks forward to meeting with shareholders at the AGM.
Alice Ryder
Chair
26 January 2023
1 All percentages calculated in Sterling terms with dividends reinvested. Alternative Performance Measures, see Glossary in the Company’s Annual Report for the year ended 31 October 2022.
Investment Manager’s Report
Market Overview
Over the year to 31 October 2022, the Company’s net asset value per share (NAV) returned 7.4% and the share price returned 3.6%. This compares with a return of 10.7% in the Russell 1000 Value Index (all percentages calculated in Sterling terms with dividends reinvested). For the same period, U.S. large cap stocks, as represented by the S&P 500® Index, declined by 14.6% in US Dollar terms and advanced by 1.7% in Sterling terms due to the strength of the dollar.
Following the adoption of the new investment strategy on 29 July 2021 to incorporate explicit Environmental, Social and Governance objectives, and the repositioning of the portfolio to reflect the changes, the Company’s NAV returned 15.0% and the share price returned 13.1%, compared with a return in the Russell 1000 Value Index of 16.2%. All percentages are calculated in Sterling terms with dividends reinvested. The following highlights some of the key market events during the fiscal year.
U.S. equities rallied in the fourth quarter of 2021 as strong gains in October were propelled by better-than-expected corporate earnings results. Investors began to digest the Federal Reserve’s (the Fed) plans to begin asset purchase tapering and weighed Omicron variant uncertainty. By December 2021, Omicron worries dissipated due in part to studies that suggested the variant was less severe than past strains. Fed policy also continued to evolve in the closing weeks of the year, as the U.S. central bank signalled it would slow its bond purchases at a quicker pace and that it had pencilled in the potential for multiple rate hikes in 2022.
A confluence of negative factors set U.S. stocks up for a difficult start to the year, including rising interest rates, high inflation and unthinkable violence and human tragedy in Europe. The S&P 500 recorded its worst January since 2009 and officially hit correction territory (a 10%+ decline) in February, before rallying higher in March. The Fed struck an increasingly aggressive tone during the quarter, as inflation figures hit 40-year highs, and Russian sanctions intensified supply-driven price pressures across oil & gas, industrial metals and various agricultural commodities. The U.S. central bank officially began its hiking cycle with a quarter-point increase in March 2022, the first since 2018.
In the second quarter, U.S. equities remained under immense pressure as investors priced in further interest rate rises and increased recession fears. Unsurprisingly, annual inflation accelerated to 8.6% in May, the highest reading since December 1981. To combat rising inflation, the Fed was forced to take increasingly aggressive measures with rate hikes: a 0.50% increase in early May followed by a 0.75% increase in mid-June. While the U.S. economy has remained resilient in the face of these rate hikes, signs of an economic slowdown have emerged. As a result, the focus on high inflation shifted towards a potential economic recession as interest rates rose and stock markets remained volatile.
In the second half of 2022, persistently high inflation spurred the Fed to continue hiking interest rates aggressively, including 0.75% increases in July and September, respectively. Fed Chair Jerome Powell also spoke harshly about fighting inflation during his late August Jackson Hole speech, stating “we must keep at it until the job is done”. Despite central bank policy efforts, weakening housing data and a general decline in commodities prices, inflation remained firmly embedded in the U.S. economy amid a tightly supplied labour market. This backdrop, combined with anticipation of further rate hikes, stoked recessionary fears and weighed on market sentiment.
Portfolio overview
The largest contributor to relative performance was stock selection and allocation decisions in communication services. Within the sector, an underweight to the media industry and our decision not to invest in the interactive media & services industry accounted for the majority of relative outperformance. In energy, investment decisions in the oil, gas, & consumable fuels industry boosted relative returns. Furthermore, stock selection in utilities proved beneficial due to stock selection and an overweight allocation to the multi-utilities industry.
The largest detractor from relative performance was stock selection and allocation decisions in consumer discretionary. Stock selection within the sector accounted for the majority of underperformance, although allocation decisions in the household durables industry proved costly as well. In financials, stock selection within the insurance industry proved detrimental, as did our decision of not investing in diversified financial services companies. Other modest detractors from relative results included stock selection within health care, mainly in the health care equipment & supplies and pharmaceuticals industries.
Below is a comprehensive overview of our allocations (in Sterling) at the end of the period.
Information Technology (IT): 5.3% overweight (13.9% of the portfolio)
An increasing number of companies in the technology sector are what we refer to as “industrial tech”. These firms are competitively insulated from disruptors, well-positioned to take advantage of long-term secular tailwinds and exhibit growth in earnings and Free Cash Flow (FCF). Strong earnings growth and FCF generation is also translating to an increasing number of companies paying growing dividends to shareholders. This is in stark contrast to the dot-com era where growth was often prioritised over shareholder return. We believe this trend is poised to continue. Our preferred exposures in the sector include IT services and communications equipment companies with sticky revenue streams such as Cisco Systems (2.8% of the portfolio), Cognizant Technology Solutions (2.6% of the portfolio), and Fidelity National Information Services (2.1% of the portfolio). We also continue to invest in software companies with capital-light business models such as Microsoft (1.9% of the portfolio). IT broadly scores well on Environmental, Social and Governance (ESG) metrics given the generally lower environmental impact than other sectors, with our selection of companies including a mix of ESG leaders (Microsoft and Cisco Systems) and ESG improvers (Fidelity National Information Services).
Consumer Discretionary: 3.9% overweight (10.0% of the portfolio)
Within the sector, our preferred areas of investment include household durables, textiles and apparel, and firms with auto-related exposure. Disruption risks persist in the sector, and we believe these risks are best mitigated through identifying stock-specific investment opportunities that either trade at discounted valuations or have business models that are somewhat insulated from disruptive pressures. For example, we believe companies such as General Motors (autos; 2.3% of the portfolio) and Ralph Lauren (apparel; 2.2% of the portfolio) offer investors exposure to underappreciated franchises at discounted valuations. Furthermore, retailers such as Dollar Tree (dollar store; 1.8% of the portfolio) provide us with access to businesses that can potentially compound earnings and are more immune to disruptive forces. From a sustainability standpoint, our selection of companies includes a mix of ESG leaders such as Panasonic (1.7% of the portfolio), as well as ESG improvers with clear roadmaps for better ESG adherence and disclosures (i.e. General Motors’ commitment to electric vehicles and Ralph Lauren’s Global Citizen initiative).
Financials: 1.6% overweight (21.9% of the portfolio)
Financials represent our portfolio’s largest absolute sector allocation and we remain particularly bullish on companies in the banks, insurance, and wealth management industries. The U.S. banks offer investors a combination of strong balance sheets (their capital levels are meaningfully higher post financial crisis), attractive valuations, and the potential for relative upside versus the broader market from inflation and higher interest rates. We believe the current credit cycle is in its early stages as loan growth is starting to pick up and consumer balance sheets remain quite healthy. In our view this setup could result in upside surprise versus consensus expectations on both growth and credit expectations over the next several years. Secondly, we continue to like insurers and insurance brokers as these companies operate relatively stable businesses and trade at attractive valuations. We categorise most of our holdings in this sector as ESG improvers, with opportunities for company managements to enact stronger corporate governance and human capital development policies. Lastly, we have also identified stock specific investments in wealth management as companies such as Morgan Stanley (1.4% of the portfolio) and Charles Schwab (1.2% of the portfolio) stand out from peers due to their differentiated investment platforms, proximity to end customers and runways for long-term growth.
Materials: 0.2% overweight (4.3% of the portfolio)
Our exposure to the materials sector is stock specific. In the metals & mining industry we have a single position in Newmont (1.3% of the portfolio), an advantaged gold miner that operates on the lower end of the cost curve and we view as an ESG leader. We sold our position in Steel Dynamics, the fifth largest U.S. steel producer, in August 2022 based on valuation. Meanwhile, Newmont stands above its gold mining peers due to its strong governance, safety record and environmental management commitments. Within the containers & packaging industry, we have a position in Sealed Air (1.6% of the portfolio), a manufacturer of film packaging for perishable food and industrials/e-commerce. Sealed Air operates a high return business, has good pricing power and in our view offers a relatively stable growth outlook. From a sustainability standpoint, plastic packagers generally score poorly on waste and water stress. The key issue for plastic is how to improve circularity and management has pledged to have 100% recyclable/reusable solutions and 50% average recycled/renewable content by 2025, which is well ahead of peers.
Health Care: 3.4% overweight (20.4% of the portfolio)
Secular growth opportunities in health care are a byproduct of demographic trends. Older populations spend more on health care than younger populations. In the United States, a combination of greater demand for health care services and rising costs facilitates a need for increased efficiency within the health care ecosystem. We believe innovation and strong cost control can work together to address this need and companies that can contribute to this outcome may be poised to benefit. On the innovation front, we are finding opportunities in pharmaceuticals and among companies in the health care equipment & supplies industry. We prefer to invest in pharma companies with a proven ability to generate high research & development productivity versus those that focus on one or two key drugs and rely upon raising their prices to drive growth. Outside of pharma, our search for attractively priced innovators is more stock specific; we recently initiated a position in Baxter International (1.9% of the portfolio) a health care company focused on products to treat kidney disease and other chronic medical conditions. We believe the company is poised to do well as margin pressures from temporary inflation (logistics and shipping) suppress and the economy continues to reopen. From a cost perspective, health maintenance organisations (HMOs) have an economic incentive to drive down costs as they provide health insurance coverage to constituents. These efforts ultimately help to make health care insurance affordable to more people and the HMOs also play a substantial role in improving the access to and quality of health care its members receive. Fundamentally, we believe our holdings in the sector can benefit from downward pressure on cost-trend, new membership growth and further industry consolidation over time. Furthermore, they trade at meaningfully discounted valuations versus peers, offering us an attractive risk versus reward opportunity.
Energy: 0.1% underweight (8.7% of the portfolio)
The portfolio currently invests in five energy stocks and we have a neutral weight in the sector relative to the reference index. Our focus on sustainability places a high hurdle for energy companies to be included in the portfolio, but we believe the sector remains investable, as more traditional oil & gas operators are critical in the energy transition towards less carbon intensive sources. For example, natural gas is 40-60% less carbon-intensive to produce and combust versus coal and oil. We view natural gas as a key “bridge fuel” and like companies such as Woodside Energy Group (2.0% of the portfolio) and EQT (1.3% of the portfolio). Fundamentally, we generally seek to invest in attractively priced operators with good resource assets that have the opportunity to improve upon environmental issues or demonstrate clear leadership in sustainability (i.e. through their exposure to renewables or commitments to net zero/carbon neutral outcomes). We also prefer to target companies with experienced management teams, low financial leverage and disciplined capital expenditure spending plans, as these elements can contribute to positive free cash flow generation over time.
Utilities: 1.4% underweight (4.2% of the portfolio)
The portfolio currently invests in only two utility stocks and we have a slight underweight in the sector relative to the reference index. Portfolio exposures are stock specific as we are finding pockets of investment opportunity among U.S. regulated utilities, which add a level of stability and defensiveness to the portfolio through their durable earnings and dividend profiles. Our investments in the sector primarily focus on ESG leaders that have specific targets for reduction in carbon emissions and maintain significant exposure to renewables or generate power through cleaner means such as natural gas.
Communication Services: 2.9% underweight (4.4% of the portfolio)
The portfolio has an underweight to communication services. Our underweight is driven by expensive valuations and a lack of dividend payers in the entertainment and interactive media & services industries. Meanwhile, the portfolio is overweight to the diversified telecom services and wireless telecom services industries. Notable portfolio holdings include Verizon Communications (diversified telecom; 2.8% of the portfolio) and Rogers Communications (wireless telecom; 1.6% of the portfolio). Verizon Communications and Rogers Communications trade at reasonable valuations, boast strong competitive positions and rank well on ESG metrics versus peers. We also like that their core businesses, operating telecom networks, can be a key enabler of smart cities of the future, with potential to reduce energy consumption and provide other social benefits.
Consumer Staples: 1.9% underweight (5.4% of the portfolio)
The consumer staples sector is a common destination for the conservative equity income investor. Historically, many of these companies have offered investors recognisable brands, diverse revenue streams, exposure to growing end markets and the ability to garner pricing power. These characteristics, in turn, have translated into strong and often stable free cash flow and growing dividends for shareholders. In recent years, some of these secular advantages have become challenged, in our view, due to changing consumer preferences, greater end market competition from local brands and disruption from the rapid adoption of online shopping. These challenges, combined with higher than historical valuations, have facilitated our underweight positioning in the sector. Notable portfolio holdings include PepsiCo (2.6% of the portfolio). We held Lamb Weston Holdings during the year and exited the position before the year end. We view each of these businesses as ESG leaders: PepsiCo stands out for reducing its water usage and product carbon footprint and Lamb Weston is at the forefront of implementing strong corporate governance practices.
Real Estate: 3.2% underweight (1.3% of the portfolio)
The portfolio has an underweight allocation to real estate, as we are finding few companies in the sector with both attractive valuations and strong or improving fundamentals. For example, retail REITs are facing challenges due to e-commerce and its negative impact on traditional brick and mortar retailers. Meanwhile, data center and logistics companies have strong fundamentals, but we view their valuations as unattractive. Our only portfolio holding is CBRE Group (1.3% of the portfolio), the world’s largest commercial real estate services firm. The company is trading at a wide discount relative to peers and ranks well on ESG metrics versus peers. CBRE Group signed the Climate Pledge in 2021 to reach net zero by 2040.
Industrials: 4.9% underweight (5.5% of the portfolio)
The portfolio is meaningfully underweight to the industrials sector. Our selectivity is driven by relative valuations, which we view as expensive, in many cases, versus other cyclical value segments of the U.S. equity market. Notable positions include Komatsu (1.9% of the portfolio), a Japanese manufacturer of construction and mining equipment, and Norfolk Southern (1.7% of the portfolio), a major U.S. east coast railroad operator. We view both companies as ESG leaders in their respective domains. Komatsu has set meaningful targets for reduced CO2 emissions from its products by 2030 and to achieve carbon neutrality by 2050. Furthermore, Norfolk Southern provides us with exposure to a consolidated industry with pricing power that emits roughly one-third as much CO2 as trucks (the main shipping alternative), in moving an equivalent amount of cargo.
Market outlook
Investors and policymakers alike are finding themselves in quite an unusual and uncertain market environment. Over the past twelve months we have seen geopolitical tensions rise, rapid inflation, increased market volatility and the fastest pace of central bank tightening in decades. We believe elevated core inflation will linger for a while longer and a recession is to be expected across developed markets. In this vein, central banks are in a difficult position as they must address inflation but remain cognisant of growth at risk. While inflation seems to have finally stopped rising, it remains stubbornly elevated, but we believe inflation will inevitably drop in 2023 as commodity prices decline and energy and food inflation falls. Core goods inflation will decline as supply shortages decrease and shipping costs continue to fall. However, risks remain around price pressures in the service sector and central banks must stay ahead to curb long-term, high inflation.
Now, more than ever, is a time to be very cautious and strategic in portfolios. As a shallow recession is more likely than not, we can expect U.S. GDP to contract and unemployment to rise slightly. Further rate hikes are to be expected as the year progresses and as policymakers struggle with inflation running well above central bank targets. All told, we see potential downside risk for equity markets as companies will have to navigate a tumultuous market environment with slowing demand and cost pressures, ultimately leading to margin reduction. While we are conscious of the risks, we continue to favour high quality companies with strong balance sheets at reasonable valuations.
Tony DeSpirito, David Zhao and Lisa Yang
BlackRock Investment Management LLC
26 January 2023
TEN LARGEST INVESTMENTS
1 + Sanofi (2021: 12th)
Health Care
Market value: £5,175,000
Share of investments: 2.9% (2021: 2.3%)
ESG Leader
Sanofi is a French multinational pharmaceutical and health care company, and it operates in three segments including pharmaceuticals, vaccines and consumer health. Sanofi is a leader in diabetes, immunology and cardiovascular management and also maintains strong consumer brands such as Allegra, IcyHot, GoldBond and Rolaids. The company also has a wide portfolio of vaccines including a leading influenza vaccine business. While Sanofi has been subject to various inquiries around insulin pricing, this represents a diminishing part of the overall business as many of these drugs have seen rapidly declining prices due to generic competition. We believe Sanofi trades at a discount relative to peers with low exposure to US regulatory reform. With the newly appointed CEO who we know well from Novartis, we believe the company’s research & development and innovation track record can be turned around.
2 + Wells Fargo (2021: 4th)
Financials
Market value: £5,138,000
Share of investments: 2.9% (2021: 3.3%)
ESG Improver
Wells Fargo (WFC) is one of the largest U.S. banks and it operates in three segments including community banking, wholesale banking and wealth & investment management. WFC has a strong deposit franchise and we like its history of strong investment returns and prudent credit risk management. While WFC has a chequered history, we believe its current management team, led by CEO Charlie Scharf (hired in October 2019), can restore the firm’s reputation as a premiere community bank. Operational improvements require patience, but we believe that risk and control remediation as well as time-passed can ultimately improve WFC’s low social and governance scores. In summary, we view shares of the company as underappreciated today in an environment characterised by low credit losses and ample access to liquidity.
3 + Willis Towers Watson (2021: 29th)
Financials
Market value: £5,117,000
Share of investments: 2.9% (2021: 1.7%)
ESG Improver
Willis Towers Watson (WLTW) is a British-American multinational insurance advisor company. WLTW’s revenue breakdown is approximately 55% consulting related and 45% insurance brokerage related. Historically, WLTW has lagged its peers on margins and has had higher restructuring costs. We believe there is a margin improvement opportunity on the horizon, specifically in their insurance brokering related businesses. Additionally, WLTW’s valuation relative to peers is at historically wide levels. The board has seen many positive changes since late 2021 and we believe this will improve WLTW’s sustainability rating over time.
4 + Verizon Communications (2021: 14th)
Communication Services
Market value: £4,967,000
Share of investments: 2.8% (2021: 2.3%)
ESG Leader
Verizon Communications is the leading wireless company in the United States. We believe the company trades at a reasonable price relative to the quality and stability of the business due to competitive dynamics that have somewhat abated, as T-Mobile has pivoted to a margin growth strategy (from a share gain strategy). The company also has some optionality on new types of revenue enabled by 5th generation networks. Telecommunication networks can be key enablers for smart cities, with the potential to reduce energy consumption, increase safety and provide other social benefits.
5 – Cisco Systems (2021: 1st)
Information Technology
Market value: £4,935,000
Share of investments: 2.8% (2021: 4.0%)
ESG Leader
Cisco Systems is the world’s largest networking equipment vendor, with leading positions in most of its core end markets. As one of the largest suppliers of network security solutions, Cisco System’s products help customers to enhance data security and privacy. Despite market concerns regarding competition and Cloud migration, we believe they can still deliver sustainable revenue and earnings growth due to better than feared market positions, a diversified portfolio and a large existing installed base.
6 + Laboratory Corporation of America (2021: N/A)
Health Care
Market value: £4,909,000
Share of investments: 2.8% (2021: N/A)
ESG Leader
Laboratory Corporation of America, commonly known as LabCorp, operates in two segments including a low-cost, high quality national provider of laboratory services and a contract research organisation, which supports clinical research through administering trials and lab testing. LabCorp is able to offer high quality service at a materially lower cost due to scale. We believe LabCorp’s drug development business is underearning peers, which allows management to drive cost savings. Lastly, diagnostic testing is vital to generating positive health outcomes and LabCorp supports low-cost testing services, helping drive testing accessibility nationally.
7 + PepsiCo (2021: 18th)
Consumer Staples
Market value: £4,595,000
Share of investments: 2.6% (2021: 2.1%)
ESG Leader
PepsiCo is a multinational food, snack and beverage corporation with the majority of the profits stemming from their snacks business (75%). PepsiCo’s key brands include Lays, Doritos, Pepsi, Gatorade and Mountain Dew. Frito-Lay, a subsidiary of PepsiCo that manufactures corn chips, potato chips and other snack foods is one of the best assets in the packaged food industry. We believe Frito-Lay has the ability to sustainably grow ~5% in North America and ~8% in international markets where it remains underpenetrated. Lastly, PepsiCo is a leader within the consumer staples industry in managing its water and product carbon footprint, targeting a reduction in its carbon footprint across its value chain by 20% by 2030 and water use by 15% by 2025.
8 + Cigna (2021: 16th)
Health Care
Market value: £4,563,000
Share of investments: 2.6% (2021: 2.2%)
ESG Leader
Cigna is a multinational company that operates in two main segments including a traditional managed care business which operates a primarily fee-based commercial insurance business and a pharmacy benefit managers/health care services segment that provides pharmacy benefits and broader health care services to a wide variety of customers. We believe managed care companies play a substantial role in improving access and quality in health care to its members and in driving down costs to make health insurance affordable to more people. In 2015, Cigna became the first health services company to sign on to and commit to the UN Global Compact principles, which is a pact to encourage businesses and firms worldwide to adopt sustainable and socially responsible policies and to report on their implementation. Currently, Cigna is trading at a meaningful discount to peers and offers an attractive entry point to gain exposure to a high quality, double digits earnings compounder at a reasonable valuation.
9 – Cognizant Technology Solutions (2021: 5th)
Information Technology
Market value: £4,525,000
Share of investments: 2.6% (2021: 3.2%)
ESG Leader
Cognizant Technology Solutions is an IT Services company with a diversified revenue base across industry verticals and geographies. As a service provider, they help enterprise and small and medium business clients to transition to cloud infrastructure, which is more efficient versus sub-scale in-house data centers. The company also exhibits strong governance as evidenced by an independent chairman, an independent majority and a gender diverse board. After a period of market share loss and earnings guide-downs, we do not believe Cognizant Technology Solutions is structurally impaired. Rather, we see an attractive turnaround opportunity under CEO Brian Humphries who joined the firm in April 2019.
10 – American International (2021: 8th)
Financials
Market value: £4,474,000
Share of investments: 2.5% (2021: 2.9%)
ESG Leader
American International (AIG) is a diversified insurance company with exposure to both property & casualty and life insurance. AIG’s business model entails pooling and diversifying risk and this includes insuring against adverse events related to climate change such as floods, hurricanes, etc. New management at AIG has spent the past several years fixing a variety of operational issues at the firm. Notably, AIG has expanded margins, increased reserves, lowered expenses and better managed catastrophe losses via improved use of reinsurance. Despite these developments, the stock still trades at an underappreciated valuation.
All percentages reflect the value of the holding as a percentage of total investments.
Percentages in brackets represent the value of the holding as of 31 October 2021.
Together, the ten largest investments represent 27.4% of the Company’s portfolio (31 October 2021: 31.7%).
Investments as at 31 October 2022
Company | Country | Sector | Securities | Market value £’000 | % of total portfolio |
| Sanofi | France | Health Care | Ordinary shares | 5,175 | 2.9 |
| Wells Fargo | United States | Financials | Ordinary shares | 5,138 | 2.9 |
| Willis Towers Watson | United States | Financials | Ordinary shares | 5,117 | 2.9 |
| Verizon Communications | United States | Communication Services | Ordinary shares | 4,967 | 2.8 |
| Cisco Systems | United States | Information Technology | Ordinary shares | 4,935 | 2.8 |
| Laboratory Corporation of America | United States | Health Care | Ordinary shares | 4,909 | 2.8 |
| PepsiCo | United States | Consumer Staples | Ordinary shares | 4,595 | 2.6 |
| Cigna | United States | Health Care | Ordinary shares | 4,563 | 2.6 |
| Cognizant Technology Solutions | United States | Information Technology | Ordinary shares | 4,525 | 2.6 |
| American International | United States | Financials | Ordinary shares | 4,474 | 2.5 |
| Shell | United Kingdom | Energy | Ordinary shares | 4,466 | 2.5 |
| AstraZeneca | United Kingdom | Health Care | Ordinary shares | 4,412 | 2.5 |
| Citigroup | United States | Financials | Ordinary shares | 4,137 | 2.4 |
| General Motors | United States | Consumer Discretionary | Ordinary shares | 3,956 | 2.3 |
| Ralph Lauren | United States | Consumer Discretionary | Ordinary shares | 3,793 | 2.2 |
| Sempra | United States | Utilities | Ordinary shares | 3,685 | 2.1 |
| Fidelity National Information Services | United States | Information Technology | Ordinary shares | 3,659 | 2.1 |
| Cardinal Health | United States | Health Care | Ordinary shares | 3,623 | 2.1 |
| Public Service Enterprise Group | United States | Utilities | Ordinary shares | 3,617 | 2.1 |
| Humana | United States | Health Care | Ordinary shares | 3,565 | 2.0 |
| Anthem | United States | Health Care | Ordinary shares | 3,556 | 2.0 |
| Woodside Energy Group | Australia | Energy | Ordinary shares | 3,461 | 2.0 |
| Baxter International | United States | Health Care | Ordinary shares | 3,341 | 1.9 |
| Cheniere Energy | United States | Energy | Ordinary shares | 3,306 | 1.9 |
| Komatsu | Japan | Industrials | Ordinary shares | 3,293 | 1.9 |
| Microsoft | United States | Information Technology | Ordinary shares | 3,251 | 1.9 |
| Dollar Tree | United States | Consumer Discretionary | Ordinary shares | 3,244 | 1.8 |
| Comerica | United States | Financials | Ordinary shares | 3,145 | 1.8 |
| Norfolk Southern | United States | Industrials | Ordinary shares | 3,050 | 1.7 |
| JPMorgan Chase | United States | Financials | Ordinary shares | 3,026 | 1.7 |
| Panasonic | Japan | Consumer Discretionary | Ordinary shares | 2,926 | 1.7 |
| Western Digital | United States | Information Technology | Ordinary shares | 2,923 | 1.7 |
| Reckitt Benckiser Group | United Kingdom | Consumer Staples | Ordinary shares | 2,893 | 1.6 |
| Rogers Communications | Canada | Communication Services | Ordinary shares | 2,893 | 1.6 |
| Sealed Air | United States | Materials | Ordinary shares | 2,817 | 1.6 |
| Morgan Stanley | United States | Financials | Ordinary shares | 2,546 | 1.4 |
| Citizens Financial Group | United States | Financials | Ordinary shares | 2,478 | 1.4 |
| PPG Industries | United States | Materials | Ordinary shares | 2,476 | 1.4 |
| CBRE Group | United States | Real Estate | Ordinary shares | 2,258 | 1.3 |
| EQT | United States | Energy | Ordinary shares | 2,257 | 1.3 |
| Newmont | United States | Materials | Ordinary shares | 2,224 | 1.3 |
| Zebra Technologies | United States | Information Technology | Ordinary shares | 2,049 | 1.2 |
| Charles Schwab | United States | Financials | Ordinary shares | 2,047 | 1.2 |
| Kraft Heinz | United States | Consumer Staples | Ordinary shares | 2,036 | 1.2 |
| Prudential | United Kingdom | Financials | Ordinary shares | 1,978 | 1.1 |
| Newell Brands | United States | Consumer Discretionary | Ordinary shares | 1,909 | 1.1 |
| L3Harris Technologies | United States | Industrials | Ordinary shares | 1,830 | 1.0 |
| Visa | United States | Information Technology | Ordinary shares | 1,751 | 1.0 |
| Invesco | United States | Financials | Ordinary shares | 1,710 | 1.0 |
| Hess | United States | Energy | Ordinary shares | 1,699 | 1.0 |
| Novo Nordisk | Denmark | Health Care | Ordinary shares | 1,698 | 1.0 |
| Lear | United States | Consumer Discretionary | Ordinary shares | 1,641 | 0.9 |
| Robert Half | United States | Industrials | Ordinary shares | 1,639 | 0.9 |
| First American | United States | Financials | Ordinary shares | 1,448 | 0.8 |
| Fidelity National | United States | Financials | Ordinary shares | 1,351 | 0.8 |
| Ciena | United States | Information Technology | Ordinary shares | 989 | 0.6 |
| Eli Lilly | United States | Health Care | Ordinary shares | 975 | 0.6 |
| —————- | —————- | ||||
| Portfolio | 175,425 | 100.0 | |||
| ========== | ========== |
All investments are in ordinary shares unless otherwise stated. The number of holdings as at 31 October 2022 was 57 (31 October 2021: 54).
At 31 October 2022, the Company did not hold any equity interests comprising more than 3% of any company’s share capital.
DISTRIBUTION OF INVESTMENTS AS AT 31 OCTOBER 2022
| Total % | Reference Index % | |
| Communication Services | 4.4 | 7.3 |
| Consumer Discretionary | 10.0 | 6.1 |
| Consumer Staples | 5.4 | 7.3 |
| Energy | 8.7 | 8.8 |
| Financials | 21.9 | 20.3 |
| Health Care | 20.4 | 17.0 |
| Industrials | 5.5 | 10.4 |
| Information Technology | 13.9 | 8.6 |
| Materials | 4.3 | 4.1 |
| Real Estate | 1.3 | 4.5 |
| Utilities | 4.2 | 5.6 |
Sources: BlackRock and Datastream.
Environmental, Social and Governance issues and approach
The Board’s approach to ESG
The Board believes that responsible investment and sustainability are integral to the longer-term delivery of the Company’s success. The Board works closely with the Investment Manager regularly to review the Company’s performance, investment strategy and underlying policies to ensure that the Company’s investment objective continues to be met in an effective, responsible and sustainable way in the interests of shareholders and future investors.
The Board has been mindful of the increase in demand for investment products that place a sustainable investment philosophy at their core, a trend that has accelerated in recent years. Accordingly, the Company’s investment objective and investment policy incorporates a sustainable investment approach into the investment policy so that the Company is managed in a way which is compatible with the principles of sustainable investment adopted by the Company. In addition, one of the Company’s non-executive Directors has responsibility for sustainability, working alongside the rest of the Board and the Investment Manager.
The Company promotes environmental or social characteristics under the EU Sustainable Finance Disclosure Regulation (SFDR) and is classified as an Article 8 product. Further detail around how the Company has achieved these characteristics and objectives, is included in the sustainability-related disclosures supplementary section to the Annual Report.
BlackRock Sustainable American Income Trust plc – BlackRock Investment Stewardship Engagement with portfolio companies for the year ended 31 October 2022
The Company’s portfolio is managed by the Fundamental Equities division of BlackRock’s Portfolio Management Group which consists of 28 investment professionals. The team engages with company management teams and undertakes company meetings to identify the best management teams in the region with the ability to create value for shareholders over the long term. In addition, BlackRock also has a separate BlackRock Investment Stewardship (BIS) team. Consistent with BlackRock’s fiduciary duty as an asset manager, BIS seeks to support investee companies in their efforts to deliver long-term durable financial performance on behalf of BlackRock’s clients. BIS engages with investee companies to build its understanding of these companies’ approach to addressing material business risks and opportunities. For the year to 31 October 2022, BIS held 86 company engagements on a range of governance issues with the management teams of 43 companies in the BlackRock Sustainable American Income Trust plc portfolio, representing 74% of the portfolio by value at 31 October 2022. Additional information is set out in the table and charts below, as well as the key engagement themes for the meetings held in respect of the Company’s portfolio holdings.
| Year ended 31 October 2022 | |
| Number of engagements held1 | 86 |
| Number of companies met1 | 43 |
| % of equity investments covered2 | 74.0 |
| Shareholder meetings voted at1 | 50 |
| Number of proposals voted on1 | 715 |
| Number of votes against management1 | 64 |
| % of total items voted represented by votes against management | 1.7 |
1 Source: Institutional Shareholder Services as at 31 October 2022.
2 Source: BlackRock. Company valuation as included in the portfolio at 31 October 2022 as a percentage of the total portfolio value.
ENGAGEMENT THEMES1
| Governance | 41% |
| Social | 24% |
| Environmental | 35% |
ENVIRONMENTAL ENGAGEMENT THEMES
| Climate Risk Management | 49% |
| Environmental Impact Management | 20% |
| Operational Sustainability | 24% |
| Other | 7% |
SOCIAL ENGAGMENT THEMES
| Human Capital Management | 50% |
| Social Risks and Opportunities | 39% |
| Other | 11% |
GOVERNANCE ENGAGEMENT THEMES
| Board Composition and Effectiveness | 21% |
| Board Gender Diversity | 1% |
| Business Oversight/Risk Management | 11% |
| Corporate Strategy | 25% |
| Executive Management | 6% |
| Governance Structure | 6% |
| Remuneration | 24% |
| Sustainability Reporting | 5% |
1 Engagements are with investee companies. Sources: ISS Proxy Exchange and BlackRock Investment Stewardship.
Engagements with investee companies
Case study: Integration of sustainability- related criteria in compensation policies
General Motors
Following the 2021 AGM of General Motors, a U.S. automobile manufacturer, at which the BlackRock Investment Stewardship team (BIS) supported management on pay, we discussed with management how they might enhance their compensation disclosures. In BIS’s view, there was an opportunity for the company to articulate better their strategic pivot to electric vehicles (EV) and how it was being factored into future compensation decisions. Per the company’s 2022 proxy statement, General Motors responded to shareholder feedback and provided additional detail on the goal setting process for the short-term incentive plan. The company also made changes to the design of the long- term plan, adding “Electric Vehicle financial performance measures that reward performance” among other adjustments. BIS subsequently supported the company’s Say on Pay proposal at the June 2022 AGM, which received 92.3% shareholder support.
Case study: Voting on climate-related shareholder proposals
Woodside
Woodside Petroleum Ltd. (Woodside) is an Australian oil and natural gas company. At the company’s May 2022 AGM, BIS supported two management proposals, among others, seeking shareholder approval of a merger with BHP Petroleum and of the company’s 2021 Climate Report which outlines the company’s view of climate risk and their energy transition strategy. The merger with BHP’s oil and gas business would increase the likelihood of further development of natural gas projects in Australia, which have been scrutinized by activist groups. BIS discussed these issues with Woodside and sought to understand their long-term views on climate risk management, particularly as it relates to these projects. BIS had concerns in 2021 about the comprehensiveness of the company’s climate risk management and target setting. This year’s engagement reassured BIS that the company is focused on meeting its energy transition commitments even with this gas project expansion. At the 2022 AGM, BIS did not support several shareholder proposals that it felt were overly prescriptive and risked unduly restricting management’s ability to make business decisions. BIS will continue to engage with Woodside and will discuss management’s views on the role that the company plays in the transition to a decarbonized economy, among other issues that we believe contribute to Woodside’s ability to deliver durable, long-term shareholder returns.
Case study: Supporting management proposals to approve the company’s climate action plans
Shell
At Shell Plc’s (Shell) May 2022 AGM, management proposed an advisory, non-binding shareholder vote on the progress made to date against the company’s Energy Transition Strategy. BIS supported this proposal in recognition of the company’s disclosed energy transition plan to manage climate-related risks and opportunities and the company’s progress against this strategy. BIS did not support a shareholder proposal requesting that the company set and publish targets that are consistent with the goal of the Paris Climate Agreement to limit global warming to well below 2°C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5°C. BIS believed that it was not additive to Shell’s Energy Transition Strategy and that the company’s ability to set absolute short-and medium-term scope 3 emissions reduction targets was impeded by the current uncertainty around the pace of declines in oil and gas demand as well as energy security considerations.
Sustainable investing: BlackRock’s approach
BlackRock believes that sustainability risk – and climate risk in particular – equates to investment risk, and this will drive a profound reassessment of risk and asset values as investors seek to react to the impact of climate policy changes. This in turn, in BlackRock’s view, is likely to drive a significant reallocation of capital away from traditional carbon intensive industries over the next decade. BlackRock believes that carbon-intensive companies will play an integral role in unlocking the full potential of the energy transition, and to do this, they must be prepared to adapt, innovate and pivot their strategies towards a low carbon economy.
As part of BlackRock’s structured investment process, ESG risks and opportunities (including sustainability/climate risk) are considered within the portfolio management team’s fundamental analysis of companies and industries and the Company’s portfolio managers work closely with BIS to assess the governance quality of companies and understand any potential issues, risks or opportunities.
As part of their approach to ESG integration, the portfolio managers use ESG information when conducting research and due diligence on new investments and again when monitoring investments in the portfolio. In particular, portfolio managers at BlackRock now have access to 1,200 key ESG performance indicators in Aladdin (BlackRock’s proprietary trading system) from third-party data providers. BlackRock’s internal sustainability research framework scoring is also available alongside third-party ESG scores in core portfolio management tools. BlackRock’s analysts’ sector expertise and local market knowledge allows it to engage with companies through direct interaction with management teams and conducting site visits. In conjunction with the portfolio management team, BIS meets with boards of companies frequently to evaluate how they are strategically managing their longer-term issues, including those surrounding ESG and the potential impact these may have on company financials. BIS’s and the portfolio management team’s understanding of ESG issues is further supported by BlackRock’s Sustainable and Transition Solutions (STS) function. STS looks to advance ESG research and integration, active engagement and the development of sustainable investment solutions across the firm.
Investment stewardship
Consistent with BlackRock’s fiduciary duty as an asset manager, BIS seeks to support investee companies in their efforts to deliver long-term durable financial performance on behalf of our clients. These clients include public and private pension plans, governments, insurance companies, endowments, universities, charities and, ultimately, individual investors, among others. BIS serves as an important link between BlackRock’s clients and the companies they invest in. Clients depend on BlackRock to help them meet their investment goals; the business and governance decisions that companies make will have a direct impact on BlackRock’s clients’ long-term investment outcomes and financial well-being.
Global principles
BlackRock’s approach to corporate governance and stewardship is comprised in BIS’ Global Principles and market-specific voting guidelines. BIS’ policies set out the core elements of corporate governance that guide its investment stewardship activities globally and within each regional market, including when voting at shareholder meetings for those clients who have authorised BIS to vote on their behalf. Each year, BIS reviews its policies and updates them as necessary to reflect changes in market standards and regulations, insights gained over the year through third-party and its own research, and feedback from clients and companies. BIS’ Global Principles are available on its website at https://www.blackrock.com/corporate/literature/fact-sheet/blk-responsible-investment- engprinciples-global.pdf.
Market-specific proxy voting guidelines
BIS’ voting guidelines are intended to help clients and companies understand its thinking on key governance matters. They are the benchmark against which it assesses a company’s approach to corporate governance and the items on the agenda to be voted on at a shareholder meeting. BIS applies its guidelines pragmatically, taking into account a company’s unique circumstances where relevant. BlackRock informs voting decisions through research and engages as necessary. BIS reviews its voting guidelines annually and updates them as necessary to reflect changes in market standards, evolving governance practice and insights gained from engagement over the prior year. BIS’ market-specific voting guidelines are available on its website at www.blackrock.com/corporate/about-us/ investment-stewardship#stewardship-policies.
BlackRock is committed to transparency in terms of disclosure on its stewardship activities on behalf of clients. BIS publishes its stewardship policies – such as the Global Principles, engagement priorities, and voting guidelines – to help BlackRock’s clients understand its work to advance their interests as long-term investors in public companies. Additionally, BIS publishes both annual and quarterly reports detailing its stewardship activities, as well as vote bulletins that describe its rationale for certain votes at high profile shareholder meetings. More detail in respect of BIS reporting can be found at www.blackrock.com/corporate/about-us/ investment-stewardship.
BlackRock’s reporting and disclosures
In terms of its own reporting, BlackRock believes that the Sustainability Accounting Standards Board provides a clear set of standards for reporting sustainability information across a wide range of issues, from labour practices to data privacy to business ethics. For evaluating and reporting climate-related risks, as well as the related governance issues that are essential to managing them, the Task Force on Climate-related Financial Disclosures (TCFD) provides a valuable framework.
BlackRock recognises that reporting to these standards requires significant time, analysis, and effort. BlackRock’s 2021 TCFD report can be found at www.blackrock. com/corporate/literature/continuous-disclosure-and- importantinformation/tcfd-report-2021-blkinc.pdf.
Strategic Report
The Directors present the Strategic Report of the Company for the year ended 31 October 2022. The aim of the Strategic Report is to provide shareholders with the information to assess how the Directors have performed their duty to promote the success of the Company for the collective benefit of shareholders.
The Chair’s Statement together with the Investment Manager’s Report form part of this Strategic Report. The Strategic Report was approved by the Board at its meeting on 26 January 2023.
Principal activity
The Company carries on business as an investment trust and has a premium listing on the London Stock Exchange. Its principal activity is portfolio investment. Investment trusts are pooled investment vehicles which allow exposure to a diversified range of assets through a single investment, thus spreading investment risk.
Investment objective
The Company’s objective is to provide an attractive level of income return together with capital appreciation over the long term in a manner consistent with the principles of sustainable investing adopted by the Company.
Strategy, business model and investment policy
Strategy
The Company invests in accordance with the objective given above. The Board is collectively responsible to shareholders for the long-term success of the Company and is its governing body. There is a clear division of responsibility between the Board and BlackRock Fund Managers Limited (the Manager). Matters reserved for the Board include setting the Company’s strategy, including its investment objective and policy, setting limits on gearing, capital structure, governance, and appointing and monitoring performance of service providers, including the Manager.
Business model
The Company’s business model follows that of an externally managed investment trust. Therefore, the Company does not have any employees and outsources its activities to third-party service providers including the Manager who is the principal service provider. In accordance with the Alternative Investment Fund Managers’ Directive (AIFMD) the Company is an Alternative Investment Fund (AIF). BlackRock Fund Managers Limited is the Company’s Alternative Investment Fund Manager.
The management of the investment portfolio and the administration of the Company have been contractually delegated to the Manager who in turn (with the permission of the Company) has delegated certain investment management and other ancillary services to BlackRock Investment Management (UK) Limited (the Investment Manager or BIM (UK)). The Manager, operating under guidelines determined by the Board, has direct responsibility for the decisions relating to the day-to-day running of the Company and is accountable to the Board for the investment, financial and operating performance of the Company.
The Company delegates fund accounting services to the Manager, which in turn sub-delegates these services to The Bank of New York Mellon (International) Limited (BNYM). Other service providers include the Depositary (also BNYM) and the Registrar, Computershare Investor Services PLC. Details of the contractual terms with the Manager and the Depositary and more details of arrangements in place governing custody services are set out in the Directors’ Report in the Company’s Annual Report for the year ended 31 October 2022.
Investment policy
The Company invests primarily in a diversified portfolio of North American* equity securities, with a focus on large-cap and medium-cap companies that pay and grow their dividends. ‘North America’, in accordance with the United Nations publication ‘Standard Country or Area Codes for Statistical Use’, means Bermuda, Canada, Greenland, Saint Pierre and Miquelon and United States of America and ‘North American’ shall be construed accordingly. The Company may also invest in the equity securities of companies outside North America, subject to the restrictions set out below, and may invest in securities denominated in currencies other than the official currencies of the relevant countries or areas within North America. The Company may also hold other securities from time-to-time including, inter alia, options, futures contracts, convertible securities, fixed interest securities, preference shares, non-convertible preferred stock and depositary receipts (such securities other than equity securities, together ‘Other Securities’). The Company may also write covered call options in respect of its portfolio.
To achieve the Company’s investment objective, the Investment Manager adopts a stock specific approach in managing the Company’s portfolio, selecting investments that it believes will both increase in value over the long term and provide income. The Company does not invest in companies which are not listed, quoted or traded on an exchange at the time of investment, although it may have exposure to such companies where, following investment, the relevant securities cease to be listed, quoted or traded on an exchange. Typically, it is expected that the investment portfolio will comprise between 30 and 60 equity securities. As at 31 October 2022, there were 57 holdings in the Company’s portfolio.
The Company may invest in derivatives for efficient portfolio management and in options for investment purposes and may, for investment purposes, write covered call options in respect of its portfolio. Any use of derivatives for efficient portfolio management and/or options for investment purposes is made based on the same principles of risk spreading and diversification that apply to the Company’s direct investments. For the avoidance of doubt, the Company does not enter into physical or synthetic short positions or write any uncovered options.
Portfolio risk is mitigated by investing in a diversified spread of investments. In particular, the Company observes the following investment restrictions: no single investment (including for the avoidance of doubt, any single derivative instrument) at the time of investment, shall account for more than 10% of the gross asset value of the Company; no more than 25% of the gross asset value of the Company, at the time of investment, shall be invested in securities which are not deemed to be North American* securities; no more than 35% of the gross asset value of the Company, at the time of investment, shall be exposed to any one sector; no more than 20% of the gross asset value of the Company, at the time of investment, shall be invested in Other Securities; and no more than 20% of the Company’s portfolio will be under option at any given time. (*Securities may be deemed to be North American securities if: (i) the company’s principal operations are conducted from North America; or (ii) the company’s equity securities are listed, quoted or traded on a North American stock exchange; or (iii) the company does a substantial amount of business in North America; or (iv) the issuer of securities is included in the Company’s reference index.)
In managing the Company’s portfolio, the Investment Manager, in addition to other investment criteria, takes into account the environmental, social and governance (ESG) characteristics of the relevant issuers of securities and seeks to deliver a superior ESG outcome versus the reference index by aiming for the Company’s portfolio to achieve: (i) a better ESG score than the reference index; and (ii) a lower carbon emissions intensity score than the reference index. The reference index is the Russell 1000 Value Index, or such other index as may be agreed by the Company and the Investment Manager to be appropriate from time to time. However, there can be no guarantee that these aims will be achieved and the ESG rating of the Company’s portfolio and its carbon emission intensity score may vary.
The Investment Manager also applies a screening policy (currently the BlackRock EMEA Baseline Screens policy) at the time of investment through which it seeks to limit and/or exclude direct investment (as applicable) in companies which, in the opinion of the Investment Manager, have exposure to, or ties with, certain sectors (in some cases subject to specific revenue thresholds) including but not limited to: (i) the production of certain types of controversial weapons; (ii) the distribution or production of firearms or small arms ammunition intended for retail civilians; (iii) the extraction of certain types of fossil fuel and/or the generation of power from them; (iv) the production of tobacco products or certain activities in relation to tobacco-related products; and (v) issuers which have been deemed to have failed to comply with United Nations Global Compact Principles.
Following application of the screening policy outlined above, those companies which have not yet been excluded from investment are then evaluated by the Investment Manager based on their ability to manage the risks and opportunities associated with ESG-consistent business practices and their ESG risk and opportunity credentials, such as their leadership and governance framework, which is considered essential for sustainable growth, their ability to strategically manage longer-term issues surrounding ESG and the potential impact this may have on a company’s financials. To undertake the required analyses, the Investment Manager may use data provided by external ESG data providers, proprietary models and local intelligence and may undertake site visits.
Should holdings which are compliant with the screening policy applied by the Investment Manager outlined above at the time of investment subsequently become ineligible, they will be divested within a reasonable period of time. The Company may gain limited exposure (including, but not limited to, through investment in other listed closed-ended investment funds and derivatives) to issuers with exposures that do not meet the sustainable investment principles described above. Circumstances in which such exposure may arise include, but are not limited to, where a counterparty to a derivative in which the Company invests posts collateral which is inconsistent with the Company’s sustainable investment principles or where a fund in which the Company invests does not apply any or the same sustainable investment principles as the Company and so provides exposure to securities which are inconsistent with the Company’s sustainable investment principles. The Investment Manager may take corrective action in such circumstances.
The Company may borrow up to 20 per cent of its net asset value (calculated at the time of draw down), although typically borrowings are not expected to exceed 10 per cent of its net asset value at the time of draw down. Borrowings may be used for investment purposes. The Company has entered into an overdraft facility for this purpose. The Company may enter into interest rate hedging arrangements.
The Company’s foreign currency investments are not hedged to Sterling as a matter of general policy. However, the investment team may employ currency hedging, either back to Sterling or between currencies (i.e. cross-hedging of portfolio investments).
In order to comply with the current Listing Rules, the Company also complies with the following investment restrictions (which do not form part of the Company’s investment policy): the Company will not conduct any trading activity which is significant in the context of its group as a whole; and the Company will not invest more than 10% of its gross asset value in other listed closed-ended investment funds, whether managed by the Investment Manager or not, except that this restriction shall not apply to investments in listed closed-ended investment funds which themselves have stated investment policies to invest no more than 15% of their gross assets in other listed closed-ended investment funds.
Information regarding the Company’s investment exposures is contained within the schedule of investments in the Company’s Annual Report for the year ended 31 October 2022. Further information regarding investment risk and activity throughout the year can be found in the Investment Manager’s Report.
No material change will be made to the investment policy without the approval of shareholders by ordinary resolution.
Environmental impact
The direct impact of the Company’s activities is minimal as it has no employees, premises, physical assets or operations either as a producer or a provider of goods or services. Neither does it have customers. Its indirect impact occurs through the investments that it makes and this is mitigated through BlackRock’s environmental, social and governance policies.
Performance
Over the year ended 31 October 2022, the Company’s net asset value returned +7.4% compared with a return of +10.7% in the Russell 1000 Value Index. The ordinary share price returned +3.6% (all percentages are calculated in Sterling terms with dividends reinvested). The Investment Manager’s Report includes a review of the main developments during the year, together with information on investment activity within the Company’s portfolio.
Results and dividends
The results for the Company are set out in the Statement of Comprehensive Income. The total return for the year, after taxation, was a profit of £12,170,000 (2021: profit of £44,734,000) of which the revenue return amounted to a profit of £3,081,000 (2021: £3,248,000) and the capital return amounted to a profit of £9,089,000 (2021: profit of £41,486,000).
The Company pays dividends quarterly. Four quarterly interim dividends of 2.00p per share were paid on 29 April 2022, 1 July 2022, 3 October 2022 and 3 January 2023. Total dividends of 8.00p per share were paid or declared in the year ended 31 October 2022 (2021: 8.00p).
Future prospects
The Board’s main focus is to provide an attractive level of income together with capital appreciation over the long term in a manner consistent with the principles of sustainable investing. The future of the Company is dependent upon the success of the investment strategy. The outlook for the Company in the next twelve months is discussed in both the Chair’s Statement and in the Investment Manager’s Report.
Social, community and human rights issues
As an investment trust, the Company has no direct social or community responsibilities or impact on the environment. However, the Directors believe that it is important and in shareholders’ interests to consider human rights issues and environmental, social and governance factors when selecting and retaining investments. Details of the Company’s approach on socially responsible investment are set out in the Company’s Annual Report for the year ended 31 October 2022.
Modern Slavery Act
As an investment vehicle, the Company does not provide goods or services in the normal course of business and does not have customers. The Investment Manager considers modern slavery as part of supply chains and labour management within the investment process. Accordingly, the Directors consider that the Company is not required to make any slavery or human trafficking statement under the Modern Slavery Act 2015. In any event, the Board considers the Company’s supply chains, dealing predominantly with professional advisers and service providers in the financial services industry, to be low risk in relation to this matter.
Directors, gender representation and employees
The Directors of the Company on 31 October 2022 are set out in the Directors’ Biographies in the Company’s Annual Report for the year ended 31 October 2022. The Board consists of two male Directors and two female Directors. The Company does not have any executive employees.
Key performance indicators
At each Board meeting, the Directors consider a number of performance measures to assess the Company’s success in achieving its objectives. The key performance indicators (KPIs) used to measure the progress and performance of the Company over time, and which are comparable to other investment trusts, are set out in the following table. As indicated in the footnote to the table, some of these KPIs fall within the definition of ‘Alternative Performance Measures’ under guidance issued by the European Securities and Markets Authority (ESMA) and additional information explaining how these are calculated is set out in the Glossary in the Company’s Annual Report for the year ended 31 October 2022.
Additionally, the Board regularly reviews the performance of the portfolio, as well as the net asset value and share price of the Company and compares this against various companies and indices. The Board also reviews the performance of the portfolio against a reference index, the Russell 1000 Value Index. Information on the Company’s performance is given in the Chair’s Statement.
| Year ended 31 October 2022 | Year ended 31 October 2021 | |
| Net asset value per ordinary share | 213.25p | 206.08p |
| Ordinary share price (mid-market) | 197.50p | 198.25p |
| Net asset value total return1 | +7.4% | +36.0% |
| Reference index2 | +10.7% | +35.6% |
| Share price total return1 | +3.6% | +42.4% |
| Dividends per share | 8.00p | 8.00p |
| Discount to cum income net asset value3 | 7.4% | 3.8% |
| Revenue return per share | 3.84p | 4.06p |
| Ongoing charges4 | 1.01% | 1.06% |
| ========== | ========== |
1 This measures the Company’s share price and NAV total return, which assumes dividends paid by the Company have been reinvested.
2 Russell 1000 Value Index, total return basis.
3 This is the difference between the share price and the NAV per share with debt at par. It is an indicator of the need for shares to be bought back or, in the event of a premium to NAV per share, issued.
4 Ongoing charges represent the management fee and all other operating expenses excluding finance costs, direct transaction costs, custody transaction charges, VAT recovered, taxation, prior year expenses written back and certain non-recurring items as a % of average daily net assets.
Principal risks
The Company is exposed to a variety of risks and uncertainties. As required by the 2018 UK Corporate Governance Code (the UK Code), the Board has put in place a robust ongoing process to identify, assess and monitor the principal and emerging risks facing the Company, including those that would threaten its business model. A core element of this process is the Company’s risk register which identifies the risks facing the Company and assesses the likelihood and potential impact of each risk and the quality of controls operating to mitigate it. A residual risk rating is then calculated for each risk based on the outcome of the assessment.
The risk register, its method of preparation and the operation of key controls in BlackRock’s and third-party service providers’ systems of internal control, are reviewed on a regular basis by the Audit and Management Engagement Committee. In order to gain a more comprehensive understanding of BlackRock’s and other third-party service providers’ risk management processes and how these apply to the Company’s business, BlackRock’s internal audit department provides an annual presentation to the Audit Committee chairs of the BlackRock investment trusts setting out the results of testing performed in relation to BlackRock’s internal control processes. The Audit and Management Engagement Committee also periodically receives and reviews internal control reports from BlackRock and the Company’s service providers.
The Board has undertaken a robust assessment of both the principal and emerging risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity. The COVID-19 pandemic has given rise to unprecedented challenges for businesses across the globe. Additionally, the risk that unforeseen or unprecedented events including (but not limited to) heightened geo-political tensions such as the war in Ukraine, high inflation and the current cost of living crisis has had a significant impact on global markets. The Board has taken into consideration the risks posed to the Company by these events and incorporated these into the Company’s risk register. The threat of climate change has also reinforced the importance of more sustainable practices and environmental responsibility.
Emerging risks are considered by the Board as they come into view and are incorporated into the existing review of the Company’s risk register. Additionally, the Manager considers emerging risks in numerous forums and the Risk and Quantitative Analysis team produces an annual risk survey. Any material risks of relevance to the Company identified through the annual risk survey will be communicated to the Board.
The Board will continue to assess these risks on an ongoing basis. In relation to the UK Code, the Board is confident that the procedures that the Company has put in place are sufficient to ensure that the necessary monitoring of risks and controls has been carried out throughout the reporting period.
The principal risks and uncertainties faced by the Company during the financial year, together with the potential effects, controls and mitigating factors are set out in the following table.
| Principal Risk | Mitigation/Control |
| Counterparty The potential loss that the Company could incur if a counterparty is unable (or unwilling) to perform on its commitments. | Due diligence is undertaken before contracts are entered into and exposures are diversified across a number of counterparties. The Depositary is liable for restitution for the loss of financial instruments held in custody unless able to demonstrate the loss was a result of an event beyond its reasonable control. |
| Investment performance Returns achieved are reliant primarily upon the performance of the portfolio. The Board is responsible for: · deciding the investment strategy to fulfil the Company’s objective; and · monitoring the performance of the Investment Manager and the implementation of the investment strategy. An inappropriate investment policy may lead to: · underperformance compared to the reference index; · a reduction or permanent loss of capital; and · dissatisfied shareholders and reputational damage. | To manage this risk the Board: · regularly reviews the Company’s investment mandate and long-term strategy; · has set investment restrictions and guidelines which the Investment Manager monitors and regularly reports on; · receives from the Investment Manager a regular explanation of stock selection decisions, portfolio exposure, gearing and any changes in gearing and the rationale for the composition of the investment portfolio; · monitors and maintains an adequate spread of investments in order to minimise the risks associated with particular countries or factors specific to particular sectors, based on the diversification requirements inherent in the investment policy; and · receives and reviews regular reports showing an analysis of the Company’s performance against the Russell 1000 Value Index and other similar indices. |
| Legal & Regulatory Compliance The Company has been approved by HM Revenue & Customs as an investment trust, subject to continuing to meet the relevant eligibility conditions, and operates as an investment trust in accordance with Chapter 4 of Part 24 of the Corporation Tax Act 2010. As such, the Company is exempt from corporation tax on capital gains on the profits realised from the sale of its investments. Any breach of the relevant eligibility conditions could lead to the Company losing investment trust status and being subject to corporation tax on capital gains realised within the Company’s portfolio. In such event, the investment returns of the Company may be adversely affected. A serious regulatory breach could result in the Company and/or the Directors being fined or the subject of criminal proceedings, or the suspension of the Company’s shares which would in turn lead to a breach of the Corporation Tax Act 2010. Amongst other relevant laws, the Company is required to comply with the provisions of the Companies Act 2006, the Alternative Investment Fund Managers’ Directive, the UK Listing Rules, Disclosure Guidance and Transparency Rules, the Sanctions and Anti-Money Laundering Act 2018 and the Market Abuse Regulation. | The Investment Manager monitors investment movements, the level of forecast income and expenditure and the amount of proposed dividends to ensure that the provisions of Chapter 4 of Part 24 of the Corporation Tax Act 2010 are not breached. The results are reported to the Board at each meeting. Compliance with the accounting rules affecting investment trusts is also carefully and regularly monitored. The Company Secretary, Manager and the Company’s professional advisers provide regular reports to the Board in respect of compliance with all applicable rules and regulations. The Board and Manager also monitor changes in government policy and legislation which may have an impact on the Company. |
| Market Market risk arises from volatility in the prices of the Company’s investments. It represents the potential loss the Company might suffer through realising investments in the face of negative market movements. Changes in general economic and market conditions, such as currency exchange rates, interest rates, rates of inflation, industry conditions, tax laws, political events and trends can also substantially and adversely affect the securities and, as a consequence, the Company’s prospects and share price. Market risk includes the potential impact of events which are outside the Company’s control, including (but not limited to) heightened geo-political tensions and military conflict, a global pandemic and high inflation. Companies operating in sectors in which the Company invests may be impacted by new legislation governing climate change and environmental issues, which may have a negative impact on their valuation and share price. | The Board considers the diversification of the portfolio, asset allocation, stock selection and levels of gearing on a regular basis and has set investment restrictions and guidelines which are monitored and reported on by the Investment Manager. The Board monitors the implementation and results of the investment process with the Investment Manager. The Board also recognises the benefits of a closed-end fund structure in extremely volatile markets such as those experienced as a consequence of the COVID-19 pandemic, and more recently the conflict in Ukraine. Unlike open-ended counterparts, closed-end funds are not obliged to sell-down portfolio holdings at low valuations to meet liquidity requirements for redemptions. During times of elevated volatility and market stress, the ability of a closed-end fund structure to remain invested for the long term enables the Portfolio Managers to adhere to disciplined fundamental analysis from a bottom-up perspective and be ready to respond to dislocations in the market as opportunities present themselves. The Portfolio Managers spend a considerable amount of time understanding the ESG risks and opportunities facing investee companies and conduct research and due diligence on new investments and when monitoring investments in the portfolio. |
| Operational In common with most other investment trust companies, the Company has no employees. The Company therefore relies on the services provided by third parties and is dependent on the control systems of the Manager, the Depositary and Fund Accountant, which maintain the Company’s assets, dealing procedures and accounting records. The security of the Company’s assets, dealing procedures, accounting records and adherence to regulatory and legal requirements depend on the effective operation of the systems of these other third-party service providers. There is a risk that a major disaster, such as floods, fire, a global pandemic, or terrorist activity, renders the Company’s service providers unable to conduct business at normal operating effectiveness. Failure by any service provider to carry out its obligations could have a material adverse effect on the Company’s performance. Disruption to the accounting, payment systems or custody records (including cyber security risk) could prevent the accurate reporting and monitoring of the Company’s financial position. | Due diligence is undertaken before contracts are entered into with third-party service providers. Thereafter, the performance of the provider is subject to regular review and reported to the Board. The Board reviews on a regular basis an assessment of the fraud risks that the Company could potentially be exposed to and also a summary of the controls put in place by the Manager, Depositary, Custodian, Fund Accountant and Registrar specifically to mitigate these risks. Most third-party service providers produce Service Organisation Control (SOC 1) reports to provide assurance regarding the effective operation of internal controls as reported on by their reporting accountants. These reports are provided to the Audit and Management Engagement Committee for review. The Committee would seek further representations from service providers if not satisfied with the effectiveness of their control environment. The Company’s financial instruments held in custody are subject to a strict liability regime and, in the event of a loss of such financial instruments held in custody, the Depositary must return financial instruments of an identical type or the corresponding amount, unless able to demonstrate the loss was a result of an event beyond its reasonable control. The Board reviews the overall performance of the Manager, Investment Manager and all other third-party service providers on a regular basis and compliance with the Investment Management Agreement annually. The Board also considers the business continuity arrangements of the Company’s key service providers on an ongoing basis and reviews these as part of its review of the Company’s risk register. |
| Financial The Company’s investment activities expose it to a variety of financial risks which include market risk, counterparty credit risk, liquidity risk and the valuation of financial instruments. | Details of these risks are disclosed in note 15 to the Financial Statements in the Company’s Annual Report for the year ended 31 October 2022, together with a summary of the policies for managing these risks. |
| Marketing Marketing efforts are inadequate or do not comply with relevant regulatory requirements. There is a failure to communicate adequately with shareholders or reach out to potential new shareholders resulting in reduced demand for the Company’s shares and a widening of the discount. | The Board reviews marketing strategy and initiatives and the Manager is required to provide regular updates on progress. BlackRock has a dedicated investment trust sales team visiting both existing and potential clients on a regular basis. The Manager also devotes considerable resources marketing to self-directed private investors. Data on client meetings and issues raised are provided to the Board on a regular basis. All investment trust marketing documents are subject to appropriate review and authorisation. |
Section 172 statement: Promoting the success of the Company
The Companies (Miscellaneous Reporting) Regulations 2018 require directors to explain in greater detail how they have discharged their duties under Section 172(1) of the Companies Act 2006 in promoting the success of their companies for the benefit of members as a whole. This includes the likely consequences of their decisions in the longer term and how they have taken wider stakeholders’ needs into account.
The disclosure that follows covers how the Board has engaged with and understands the views of stakeholders and how stakeholders’ needs have been taken into account, the outcome of this engagement and the impact that it has had on the Board’s decisions. The Board considers the main stakeholders in the Company to be the Manager, Investment Manager and the shareholders. In addition to this, the Board considers investee companies and key service providers of the Company to be stakeholders; the latter comprise the Company’s Custodian, Depositary, Registrar and Broker.
Stakeholders
| Shareholders | Manager and Investment Manager | Other key service providers | Investee companies |
| Continued shareholder support and engagement are critical to the continued existence of the Company and the successful delivery of its long-term strategy. The Board is focused on fostering good working relationships with shareholders and on understanding the views of shareholders in order to incorporate them into the Board’s strategy and objectives in delivering an attractive level of income return together with capital appreciation over the long term in a manner consistent with the principles of sustainable investing adopted by the Company. | The Board’s main working relationship is with the Manager, who is responsible for the Company’s portfolio management (including asset allocation, stock and sector selection) and risk management, as well as ancillary functions such as administration, secretarial, accounting and marketing services. The Manager has sub-delegated portfolio management to the Investment Manager. Successful management of shareholders’ assets by the Investment Manager is critical for the Company to successfully deliver its investment strategy and meet its objective. The Company is also reliant on the Manager as AIFM to provide support in meeting relevant regulatory obligations under the AIFMD and other relevant legislation. | In order for the Company to function as an investment trust with a listing on the premium segment of the official list of the Financial Conduct Authority and trade on the London Stock Exchange’s (LSE) main market for listed securities, the Board relies on a diverse range of advisors for support in meeting relevant obligations and safeguarding the Company’s assets. For this reason, the Board considers the Company’s Custodian, Depositary, Registrar and Broker to be stakeholders. The Board maintains regular contact with its key external service providers and receives regular reporting from them through the Board and Committee meetings, as well as outside of the regular meeting cycle. | Portfolio holdings are ultimately shareholders’ assets and the Board recognises the importance of good stewardship and communication with investee companies in meeting the Company’s investment objective and strategy. The Board monitors the Manager’s stewardship arrangements and receives regular feedback from the Manager in respect of meetings with the management. |
| Areas of Engagement | Issue | Engagement | Impact |
| Investment mandate and objective | The Board has responsibility to shareholders to ensure that the Company’s portfolio of assets is invested in line with the stated investment objective and in a way that ensures an appropriate balance between spread of risk and portfolio returns. | The Board worked closely with the Investment Manager throughout the year in further developing investment strategy and underlying policies in the interests of shareholders and future investors. The Manager’s approach to the consideration of ESG factors in respect of the Company’s portfolio, as well as its engagement with investee companies, is to encourage the adoption of sustainable business practices which support long-term value creation. | The Company’s investment objective is to provide an attractive level of income together with capital appreciation over the long term in a manner consistent with the principles of sustainable investing adopted by the Company. The Board believes that it offers an attractive investment strategy with the additional alpha potential the ESG integration provides. |
| Shareholders | Continued shareholder support and engagement are critical to the continued existence of the Company and the successful delivery of its long-term strategy. | The Board is committed to maintaining open channels of communication and to engage with shareholders. The Company welcomes and encourages attendance and participation from shareholders at its Annual General Meetings. Shareholders will have the opportunity to meet the Directors and Investment Manager and to address questions to them directly. The Investment Manager will also provide a presentation on the Company’s performance and outlook. The Annual Report and Half Yearly Financial Report are available on the BlackRock website and are also circulated to shareholders. In addition, regular updates on performance, monthly factsheets, the daily NAV and other information are also published on the Manager’s website at www.blackrock.com/uk/brsa. The Board also works closely with the Manager to develop the Company’s marketing strategy. Unlike trading companies, one-to-one shareholder meetings normally take the form of a meeting with the Investment Manager as opposed to members of the Board. The Company’s willingness to enter into discussions with institutional shareholders is also demonstrated by the programmes of institutional presentations by the Portfolio Managers. If shareholders wish to raise issues or concerns with the Board, they are welcome to do so at any time. The Chair is available to meet directly with shareholders periodically to understand their views on governance and the Company’s performance where they wish to do so. She may be contacted via the Company Secretary. | The Board values any feedback and questions from shareholders ahead of and during Annual General Meetings in order to gain an understanding of their views and will take action when and as appropriate. Feedback and questions will also help the Company evolve its reporting, aiming to make reports more transparent and understandable. Feedback from all substantive meetings between the Investment Manager and shareholders will be shared with the Board. The Directors will also receive updates from the Company’s Broker on any feedback from shareholders, as well as share trading activity, share price performance and an update from the Investment Manager. Portfolio holdings are ultimately shareholders’ assets and the Board recognises the importance of good stewardship and communication with investee companies in meeting the Company’s investment objective and strategy. The Board monitors the Manager’s stewardship arrangements and receives regular feedback from the Investment Manager in respect of meetings with the management of portfolio companies. |
| Responsible investing | More than ever, the importance of good governance and consideration of sustainable investment are key factors in making investment decisions. Climate change is becoming a defining factor in companies’ long-term prospects across the investment spectrum, with significant and lasting implications for economic growth and prosperity. | The Board believes that responsible investment and sustainability are important to the longer-term delivery of the Company’s success. The Board works closely with the Investment Manager to regularly review the Company’s performance, investment strategy and underlying policies to ensure that the Company’s investment objective continues to be met in an effective and responsible way in the interests of shareholders and future investors. The Investment Manager’s approach to the consideration of ESG factors in respect of the Company’s portfolio, as well as the Investment Manager’s engagement with investee companies to encourage the adoption of sustainable business practices which support long-term value creation, are kept under review by the Board. The Board also expects to be informed by the Manager of any sensitive voting issues involving the Company’s investments. The Investment Manager reports to the Board in respect of its ESG policies and how these are integrated into the investment process; a summary of BlackRock’s approach to ESG and sustainability is set out in the Company’s Annual Report for the year ended 31 October 2022. The Investment Manager’s engagement and voting policy is detailed in the Company’s Annual Report for the year ended 31 October 2022 and on the BlackRock website. | The Board and Investment Manager believe there is likely to be a positive correlation between strong ESG practices and investment performance over time. |
| Management of share rating | The Board recognises that it is in the long-term interests of shareholders that shares do not trade at a significant discount (or premium) to their prevailing NAV. The Board believes this may be achieved by the use of share buy back powers and the issue of shares. | The Board monitors the Company’s share rating on an ongoing basis and receives regular updates from the Manager and the Company’s Broker regarding the level of discount/premium. The Board believes that the best way of maintaining the share rating at an optimal level over the long term is to create demand for the shares in the secondary market. To this end, the Investment Manager is devoting considerable effort to broadening the awareness of the Company, particularly to wealth managers and to the wider retail market. In addition, the Board has worked closely with the Manager to develop the Company’s marketing strategy, with the aim of ensuring effective communication with existing shareholders and to attract new shareholders to the Company in order to improve liquidity in the Company’s shares and to sustain the share rating of the Company. | The Board continues to monitor the Company’s premium/discount to NAV and will look to buy back or issue shares if it is deemed to be in the interests of shareholders as a whole. During the financial year the Company did not buy back or reissue any shares. The Company’s average discount for the year to 31 October 2022 was 5.3% and the discount at 23 January 2023 stood at 5.8%. |
| Service levels of third-party providers | The Board acknowledges the importance of ensuring that the Company’s principal suppliers are providing a suitable level of service, including the Manager in respect of investment performance and delivering on the Company’s investment mandate; the Custodian and Depositary in respect of their duties towards safeguarding the Company’s assets; the Registrar in its maintenance of the Company’s share register and dealing with investor queries; and the Company’s Broker in respect of the provision of advice and acting as a market maker for the Company’s shares. | The Manager reports to the Board on the Company’s performance on a regular basis. The Board carries out a robust annual evaluation of the Manager’s performance, their commitment and available resources. The Board performs an annual review of the service levels of all third-party service providers and concludes on their suitability to continue in their role. The Board receives regular updates from the AIFM, Depositary, Registrar and Broker on an ongoing basis. The ongoing COVID-19 pandemic continued to pose challenges to the operation of businesses across the globe. The Board has continued to work closely with the Manager to gain comfort that relevant business continuity plans are operating effectively for all of the Company’s key service providers. | All performance evaluations were performed on a timely basis and the Board concluded that all key third-party service providers, including the Manager, were operating effectively and providing a good level of service. The Board has received updates in respect of business continuity planning from the Company’s Manager, Custodian, Depositary, Fund Accountant, Registrar and Printer and is confident that arrangements are in place to ensure a good level of service will continue to be provided. |
| Board composition | The Board is committed to ensuring that its own composition brings an appropriate balance of knowledge, experience and skills and that it is compliant with best corporate governance practice under the UK Code, including guidance on tenure and the composition of the Board’s committees. | During the year, the Board appointed a new Director. The Nomination Committee agreed the selection criteria and the method of selection, recruitment and appointment. The services of an external search consultant, Cornforth Consulting Ltd, were used to identify potential candidates. All Directors are subject to a formal evaluation process on an annual basis. All Directors stand for re-election by shareholders annually. Shareholders may attend the Annual General Meeting and raise any queries in respect of Board composition or individual Directors in person or may contact the Company Secretary or the Chair using the details provided in the Company’s Annual Report for the year ended 31 October 2022. The Board is currently undertaking another review of succession planning arrangements having identified the need for a new Director following the retirement of the Chairman, Mr Miller, and the forthcoming retirement of Mr Casey. The services of Cornforth Consulting Ltd, are being used again to identify potential candidates. | As a result of the recruitment process, Mr Barron was appointed as a Director of the Company with effect from 22 March 2022. As at the date of this report, the Board was comprised of two men and two women. Two Directors have a tenure in excess of nine years. Details of each Director’s contribution to the success and promotion of the Company are set out in the Directors’ Report in the Company’s Annual Report for the year ended 31 October 2022 and details of Directors’ biographies can be found in the Company’s Annual Report for the year ended 31 October 2022. The Directors are not aware of any issues that have been raised directly by shareholders in respect of Board composition in the year under review. Details of the proxy voting results in favour and against individual Directors’ re-election at the 2022 Annual General Meeting are given on the Manager’s website at www.blackrock.com/uk/brsa. |
Viability statement
In accordance with provision 31 of the 2018 UK Corporate Governance Code, the Directors have assessed the prospects of the Company over a longer period than the twelve months referred to by the ‘Going Concern’ guidelines. The Company is an investment trust with the objective of providing an attractive level of income return together with capital appreciation over the long term.
The Directors expect the Company to continue for the foreseeable future and have therefore conducted this review for a period up to the Annual General Meeting in 2026. The Directors assess viability over a rolling three-year period as they believe it best balances the Company’s long-term objective, its financial flexibility and scope with the difficulty in forecasting economic conditions which could affect both the Company and its shareholders. The Company also undertakes a continuation vote every three years with the next one taking place at the Annual General Meeting in 2025.
In making an assessment on the viability of the Company, the Board has considered the following:
· the impact of a significant fall in U.S. equity markets on the value of the Company’s investment portfolio;
· the ongoing relevance of the Company’s investment objective, business model and investment policy in the prevailing market;
· the principal and emerging risks and uncertainties, as set out above, and their potential impact;
· the level of ongoing demand for the Company’s shares;
· the Company’s share price discount/premium to NAV;
· the liquidity of the Company’s portfolio; and
· the level of income generated by the Company and future income and expenditure forecasts.
The Directors have concluded that there is a reasonable expectation that the Company will continue in operation and meet its liabilities as they fall due over the period of their assessment based on the following considerations:
· the Investment Manager’s compliance with the investment objective and policy, its investment strategy and asset allocation;
· the portfolio mainly comprises readily realisable assets which continue to offer a broad range of investment opportunities for shareholders as part of a balanced investment portfolio;
· the operational resilience of the Company and its key service providers and their ability to continue to provide a good level of service for the foreseeable future;
· the effectiveness of business continuity plans in place for the Company and its key service providers;
· the ongoing processes for monitoring operating costs and income which are considered to be reasonable in comparison to the Company’s total assets;
· the Board’s discount management policy; and
· the Company is a closed-end investment company and therefore does not suffer from the liquidity issues arising from unexpected redemptions.
In addition, the Board’s assessment of BlackRock Sustainable American Income Trust ability to operate in the foreseeable future is included in the Going Concern Statement which can be found in the Directors’ Report in the Company’s Annual Report for the year ended 31 October 2022.
By order of the Board
CAROLINE DRISCOLL
For and on behalf of
BlackRock Investment Management (UK) Limited
Company Secretary
26 January 2023
BlackRock Sustainable American Income Trust plc (LON:BRSA) has announced its final results for the year ended 31 October 2022.
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PERFORMANCE RECORD
| As at 31 October 2022 | As at 31 October 2021 | |
| Net assets (£’000)1 | 171,086 | 165,334 |
| Net asset value per ordinary share (pence) | 213.25 | 206.08 |
| Ordinary share price (mid-market) (pence) | 197.50 | 198.25 |
| Discount to cum income net asset value2 | 7.4% | 3.8% |
| Russell 1000 Value Index3 | 1824.64 | 1647.89 |
| —————- | —————- | |
| Performance (with dividends reinvested) | ||
| Net asset value per share2 | 7.4% | 36.0% |
| Ordinary share price2 | 3.6% | 42.4% |
| Russell 1000 Value Index | 10.7% | 35.6% |
| ========== | ========== | |
| Performance since inception (with dividends reinvested) | ||
| Net asset value per share2 | 216.3% | 194.4% |
| Ordinary share price2 | 191.4% | 181.4% |
| Russell 1000 Value Index | 269.2% | 233.4% |
| ========== | ========== |
| Year ended 31 October 2022 | Year ended 31 October 2021 | Change % | |
| Revenue | |||
| Net profit after taxation (£’000) | 3,081 | 3,248 | -5.1 |
| Revenue earnings per ordinary share (pence)3 | 3.84 | 4.06 | -5.4 |
| —————- | —————- | —————- | |
| Interim dividends (pence) | |||
| 1st interim | 2.00 | 2.00 | – |
| 2nd interim | 2.00 | 2.00 | – |
| 3rd interim | 2.00 | 2.00 | – |
| 4th interim | 2.00 | 2.00 | – |
| Total dividends paid/payable | 8.00 | 8.00 | – |
| ========== | ========== | ========== |
1 The change in net assets reflects portfolio movements and dividends paid during the year.
2 Alternative Performance Measures, see Glossary in the Company’s Annual Report for the year ended 31 October 2022.
3 Further details are given in the Glossary in the Company’s Annual Report for the year ended 31 October 2022.
Sources: BlackRock and Datastream.
Performance figures have been calculated in Sterling terms with dividends reinvested.
CHAIR’S STATEMENT
This is my first year as Chair of your Company and I am delighted to present the Annual Report to shareholders for the year ended 31 October 2022.
Market overview
The period under review has proved highly volatile, with economic uncertainty peaking in the first half of 2022 and remaining high. Equity markets initially appeared to be driven by concerns around high inflation and the response by the Federal Reserve (the Fed). However, they then sold off heavily following Russia’s invasion of Ukraine, as the market was quick to price in potential commodity and food disruptions resulting from the conflict. China’s continuing zero tolerance approach to COVID-19 and subsequent lockdowns has also made it harder to predict global economic trends, contributing to market volatility.
The U.S. economy and stock market struggled as it faced a multi-decade high in inflation and aggressive monetary tightening by the Fed. Following the start of the COVID-19 pandemic in March 2020, the U.S. economy greatly benefited from the Fed’s supportive fiscal and monetary policy which bolstered savings and supercharged asset prices, but with that liquidity drying up and the hikes in interest rates, the risk of recession is growing.
Compared to the wider US market, the Company has benefited from two particular market developments during the year. First, the increase in interest rates (and rise in the discount rate used to value future earnings growth) has meant that value stocks have had a resurgence in performance compared to growth stocks which has favoured our Investment Manager’s style of investing. Secondly, the strength of the US Dollar compared to Sterling and other currencies over the period has meant that returns have been positive in absolute terms for Sterling-based investors.
Performance
Against this backdrop and over the year to 31 October 2022, the Company’s net asset value per share (NAV) returned 7.4%1 and the share price returned 3.6%1. This compares with a rise of 10.7%1 in the Russell 1000 Value Index, the Company’s reference index. September and October 2022 were two of the toughest months for the Company since the change in strategy at the end of July 2021, as the value style underperformed and the Company faced a combination of headwinds including the outperformance of uninvestable sectors (such as aerospace, defence and tobacco), portfolio gearing and poor sector allocation and stock selection in medical technology, consumer discretionary and financials. It is worth noting that the wider market as measured by the S&P 500 Index reached bear market territory in mid-June (a drop of 20% or more from a previous peak) and then finished the year to 31 October 2022 down by 1.7% in Sterling terms.
At the close of business on 23 January 2023, the Company’s NAV had increased by 0.7% compared to a decrease of 1.4% in the reference index (both in Sterling terms with dividends reinvested) since the year end.
Revenue earnings and dividends
The Company’s revenue earnings per share (EPS), based on the weighted average number of shares in issue for the year, amounted to 3.84p (2021: 4.06p), a decrease of 5.4%. As the Company stopped writing option contracts since 31 July 2021, the Company’s revenue EPS has increased on a like-to-like basis by 29.7% after excluding the impact of option premium income earned in the year ended 31 October 2021. Four quarterly interim dividends of 2.00p per share were paid on 29 April 2022, 1 July 2022, 3 October 2022 and 3 January 2023. This is in line with the payments made in the previous financial year. The dividend paid represents a yield of 4.1% on the share price at the year end.
Your Board considers that it remains appropriate to continue with the current dividend policy for the new financial year, which will be supported through both revenue and other distributable reserves. The Company’s distributable reserves at 31 October 2022 were £168.6 million. The Board sought shareholder authority at the previous Annual General Meeting to cancel the Company’s share premium account, effectively converting it into a distributable reserve, and this became effective in August 2022. The Board continues to believe that this dividend policy provides an attractive option for current and prospective shareholders who wish to achieve exposure to the U.S. equity market, whilst at the same time receiving a competitive dividend.
Discount/premium
The Directors recognise the importance to investors that the market price of the Company’s shares should not trade at a significant premium or discount to the underlying NAV. Accordingly, in normal market conditions, the Board may use the Company’s share buy back and share issuance powers to ensure that the share price does not go to an excessive discount or premium.
Over the year to 31 October 2022, the Company’s shares have traded at an average discount of 5.3%. The Board considered that the market volatility caused by the geo-political issues referred to above and the associated sell-off of equities has given rise to the discount and therefore it was not in shareholders’ interests to buy back shares at this point in the cycle. Consequently, no shares were bought back during the year under review and up to the date of this report. Neither were any shares reissued during the same period. Resolutions to renew the authorities to issue and buy back shares will be put to shareholders at the forthcoming Annual General Meeting.
Board composition
As previously announced in last year’s Annual Report and Half Yearly Financial Report, Simon Miller retired as Chairman at the end of the Company’s financial year on 31 October 2022. On behalf of the Board and shareholders, I would like to thank Simon for his outstanding contribution as Chairman of the Company since its inception.
Christopher Casey has also informed the Board of his intention to retire as a Director of the Company following the Annual General Meeting in March 2023 and, accordingly, will not be seeking re-election. The Board would like to express its strong appreciation for Christopher’s wise counsel and invaluable contribution to the Company since its formation in 2012. The Board has commenced a search and selection process to identify a new Director and a further announcement will be made in due course.
The Board was pleased to appoint David Barron as a new non-executive Director with effect from 22 March 2022 and it is the intention that David, a chartered accountant, will replace Mr Casey as Audit and Management Engagement Chairman. Upon Mr Miller’s retirement and my appointment as Chair effective from 1 November 2022, I retired from the role as the Company’s Senior Independent Director and Mr Barron replaced me and also became Chairman of the Nomination Committee.
Outlook
High inflation and tighter monetary policy are two important reasons why the world economy is slowing down. Since recognising the urgent need for policy tightening to combat inflationary pressures, the Fed has raised interest rates at the fastest pace in more than three decades. Most other major developed market central banks have followed suit and the scale and speed of subsequent rate rises have surprised markets.
A resilient labour market in the U.S. and excess savings have so far protected the economy from a more severe slowdown, but have given rise to more persistent inflationary trends and sustained pressure on the Fed to continue to tighten fiscal policy. In turn, higher financing costs and declining real disposable income (driven by fiscal normalisation and high inflation) will be a headwind for the economy. The odds have now shifted towards a recession in 2023, driven by a Fed that is laser focused on bringing down inflation. While inflation has peaked, it is coming down slowly and is still well above the Fed’s 2% inflation target.
It has been a difficult decade for the ‘value’ approach to investing but one of the defining characteristics of financial markets in 2022, aside from the volatility, has been the rotation from high growth stocks to ‘value’ areas of the market. Historically, value has tended to do best in periods of higher and rising rates and higher and rising inflation, so this is likely to continue to be supportive of our Portfolio Managers’ value investing approach in the near term.
Annual General Meeting (AGM)
The AGM of the Company will be held at the offices of BlackRock at 12 Throgmorton Avenue, London EC2N 2DL on Tuesday, 21 March 2023 at 12 noon. Details of the business of the meeting are set out in the Notice of Annual General Meeting in the Company’s Annual Report for the year ended 31 October 2022.
Shareholders who intend to attend the AGM should ensure that they have read and understood the venue requirements for entry to the AGM. These requirements, along with further information on the arrangements for the AGM, can be found in the Directors’ Report in the Company’s Annual Report for the year ended 31 October 2022. In the absence of any reimposition of COVID-19 restrictions, the Board very much looks forward to meeting with shareholders at the AGM.
Alice Ryder
Chair
26 January 2023
1 All percentages calculated in Sterling terms with dividends reinvested. Alternative Performance Measures, see Glossary in the Company’s Annual Report for the year ended 31 October 2022.
Investment Manager’s Report
Market Overview
Over the year to 31 October 2022, the Company’s net asset value per share (NAV) returned 7.4% and the share price returned 3.6%. This compares with a return of 10.7% in the Russell 1000 Value Index (all percentages calculated in Sterling terms with dividends reinvested). For the same period, U.S. large cap stocks, as represented by the S&P 500® Index, declined by 14.6% in US Dollar terms and advanced by 1.7% in Sterling terms due to the strength of the dollar.
Following the adoption of the new investment strategy on 29 July 2021 to incorporate explicit Environmental, Social and Governance objectives, and the repositioning of the portfolio to reflect the changes, the Company’s NAV returned 15.0% and the share price returned 13.1%, compared with a return in the Russell 1000 Value Index of 16.2%. All percentages are calculated in Sterling terms with dividends reinvested. The following highlights some of the key market events during the fiscal year.
U.S. equities rallied in the fourth quarter of 2021 as strong gains in October were propelled by better-than-expected corporate earnings results. Investors began to digest the Federal Reserve’s (the Fed) plans to begin asset purchase tapering and weighed Omicron variant uncertainty. By December 2021, Omicron worries dissipated due in part to studies that suggested the variant was less severe than past strains. Fed policy also continued to evolve in the closing weeks of the year, as the U.S. central bank signalled it would slow its bond purchases at a quicker pace and that it had pencilled in the potential for multiple rate hikes in 2022.
A confluence of negative factors set U.S. stocks up for a difficult start to the year, including rising interest rates, high inflation and unthinkable violence and human tragedy in Europe. The S&P 500 recorded its worst January since 2009 and officially hit correction territory (a 10%+ decline) in February, before rallying higher in March. The Fed struck an increasingly aggressive tone during the quarter, as inflation figures hit 40-year highs, and Russian sanctions intensified supply-driven price pressures across oil & gas, industrial metals and various agricultural commodities. The U.S. central bank officially began its hiking cycle with a quarter-point increase in March 2022, the first since 2018.
In the second quarter, U.S. equities remained under immense pressure as investors priced in further interest rate rises and increased recession fears. Unsurprisingly, annual inflation accelerated to 8.6% in May, the highest reading since December 1981. To combat rising inflation, the Fed was forced to take increasingly aggressive measures with rate hikes: a 0.50% increase in early May followed by a 0.75% increase in mid-June. While the U.S. economy has remained resilient in the face of these rate hikes, signs of an economic slowdown have emerged. As a result, the focus on high inflation shifted towards a potential economic recession as interest rates rose and stock markets remained volatile.
In the second half of 2022, persistently high inflation spurred the Fed to continue hiking interest rates aggressively, including 0.75% increases in July and September, respectively. Fed Chair Jerome Powell also spoke harshly about fighting inflation during his late August Jackson Hole speech, stating “we must keep at it until the job is done”. Despite central bank policy efforts, weakening housing data and a general decline in commodities prices, inflation remained firmly embedded in the U.S. economy amid a tightly supplied labour market. This backdrop, combined with anticipation of further rate hikes, stoked recessionary fears and weighed on market sentiment.
Portfolio overview
The largest contributor to relative performance was stock selection and allocation decisions in communication services. Within the sector, an underweight to the media industry and our decision not to invest in the interactive media & services industry accounted for the majority of relative outperformance. In energy, investment decisions in the oil, gas, & consumable fuels industry boosted relative returns. Furthermore, stock selection in utilities proved beneficial due to stock selection and an overweight allocation to the multi-utilities industry.
The largest detractor from relative performance was stock selection and allocation decisions in consumer discretionary. Stock selection within the sector accounted for the majority of underperformance, although allocation decisions in the household durables industry proved costly as well. In financials, stock selection within the insurance industry proved detrimental, as did our decision of not investing in diversified financial services companies. Other modest detractors from relative results included stock selection within health care, mainly in the health care equipment & supplies and pharmaceuticals industries.
Below is a comprehensive overview of our allocations (in Sterling) at the end of the period.
Information Technology (IT): 5.3% overweight (13.9% of the portfolio)
An increasing number of companies in the technology sector are what we refer to as “industrial tech”. These firms are competitively insulated from disruptors, well-positioned to take advantage of long-term secular tailwinds and exhibit growth in earnings and Free Cash Flow (FCF). Strong earnings growth and FCF generation is also translating to an increasing number of companies paying growing dividends to shareholders. This is in stark contrast to the dot-com era where growth was often prioritised over shareholder return. We believe this trend is poised to continue. Our preferred exposures in the sector include IT services and communications equipment companies with sticky revenue streams such as Cisco Systems (2.8% of the portfolio), Cognizant Technology Solutions (2.6% of the portfolio), and Fidelity National Information Services (2.1% of the portfolio). We also continue to invest in software companies with capital-light business models such as Microsoft (1.9% of the portfolio). IT broadly scores well on Environmental, Social and Governance (ESG) metrics given the generally lower environmental impact than other sectors, with our selection of companies including a mix of ESG leaders (Microsoft and Cisco Systems) and ESG improvers (Fidelity National Information Services).
Consumer Discretionary: 3.9% overweight (10.0% of the portfolio)
Within the sector, our preferred areas of investment include household durables, textiles and apparel, and firms with auto-related exposure. Disruption risks persist in the sector, and we believe these risks are best mitigated through identifying stock-specific investment opportunities that either trade at discounted valuations or have business models that are somewhat insulated from disruptive pressures. For example, we believe companies such as General Motors (autos; 2.3% of the portfolio) and Ralph Lauren (apparel; 2.2% of the portfolio) offer investors exposure to underappreciated franchises at discounted valuations. Furthermore, retailers such as Dollar Tree (dollar store; 1.8% of the portfolio) provide us with access to businesses that can potentially compound earnings and are more immune to disruptive forces. From a sustainability standpoint, our selection of companies includes a mix of ESG leaders such as Panasonic (1.7% of the portfolio), as well as ESG improvers with clear roadmaps for better ESG adherence and disclosures (i.e. General Motors’ commitment to electric vehicles and Ralph Lauren’s Global Citizen initiative).
Financials: 1.6% overweight (21.9% of the portfolio)
Financials represent our portfolio’s largest absolute sector allocation and we remain particularly bullish on companies in the banks, insurance, and wealth management industries. The U.S. banks offer investors a combination of strong balance sheets (their capital levels are meaningfully higher post financial crisis), attractive valuations, and the potential for relative upside versus the broader market from inflation and higher interest rates. We believe the current credit cycle is in its early stages as loan growth is starting to pick up and consumer balance sheets remain quite healthy. In our view this setup could result in upside surprise versus consensus expectations on both growth and credit expectations over the next several years. Secondly, we continue to like insurers and insurance brokers as these companies operate relatively stable businesses and trade at attractive valuations. We categorise most of our holdings in this sector as ESG improvers, with opportunities for company managements to enact stronger corporate governance and human capital development policies. Lastly, we have also identified stock specific investments in wealth management as companies such as Morgan Stanley (1.4% of the portfolio) and Charles Schwab (1.2% of the portfolio) stand out from peers due to their differentiated investment platforms, proximity to end customers and runways for long-term growth.
Materials: 0.2% overweight (4.3% of the portfolio)
Our exposure to the materials sector is stock specific. In the metals & mining industry we have a single position in Newmont (1.3% of the portfolio), an advantaged gold miner that operates on the lower end of the cost curve and we view as an ESG leader. We sold our position in Steel Dynamics, the fifth largest U.S. steel producer, in August 2022 based on valuation. Meanwhile, Newmont stands above its gold mining peers due to its strong governance, safety record and environmental management commitments. Within the containers & packaging industry, we have a position in Sealed Air (1.6% of the portfolio), a manufacturer of film packaging for perishable food and industrials/e-commerce. Sealed Air operates a high return business, has good pricing power and in our view offers a relatively stable growth outlook. From a sustainability standpoint, plastic packagers generally score poorly on waste and water stress. The key issue for plastic is how to improve circularity and management has pledged to have 100% recyclable/reusable solutions and 50% average recycled/renewable content by 2025, which is well ahead of peers.
Health Care: 3.4% overweight (20.4% of the portfolio)
Secular growth opportunities in health care are a byproduct of demographic trends. Older populations spend more on health care than younger populations. In the United States, a combination of greater demand for health care services and rising costs facilitates a need for increased efficiency within the health care ecosystem. We believe innovation and strong cost control can work together to address this need and companies that can contribute to this outcome may be poised to benefit. On the innovation front, we are finding opportunities in pharmaceuticals and among companies in the health care equipment & supplies industry. We prefer to invest in pharma companies with a proven ability to generate high research & development productivity versus those that focus on one or two key drugs and rely upon raising their prices to drive growth. Outside of pharma, our search for attractively priced innovators is more stock specific; we recently initiated a position in Baxter International (1.9% of the portfolio) a health care company focused on products to treat kidney disease and other chronic medical conditions. We believe the company is poised to do well as margin pressures from temporary inflation (logistics and shipping) suppress and the economy continues to reopen. From a cost perspective, health maintenance organisations (HMOs) have an economic incentive to drive down costs as they provide health insurance coverage to constituents. These efforts ultimately help to make health care insurance affordable to more people and the HMOs also play a substantial role in improving the access to and quality of health care its members receive. Fundamentally, we believe our holdings in the sector can benefit from downward pressure on cost-trend, new membership growth and further industry consolidation over time. Furthermore, they trade at meaningfully discounted valuations versus peers, offering us an attractive risk versus reward opportunity.
Energy: 0.1% underweight (8.7% of the portfolio)
The portfolio currently invests in five energy stocks and we have a neutral weight in the sector relative to the reference index. Our focus on sustainability places a high hurdle for energy companies to be included in the portfolio, but we believe the sector remains investable, as more traditional oil & gas operators are critical in the energy transition towards less carbon intensive sources. For example, natural gas is 40-60% less carbon-intensive to produce and combust versus coal and oil. We view natural gas as a key “bridge fuel” and like companies such as Woodside Energy Group (2.0% of the portfolio) and EQT (1.3% of the portfolio). Fundamentally, we generally seek to invest in attractively priced operators with good resource assets that have the opportunity to improve upon environmental issues or demonstrate clear leadership in sustainability (i.e. through their exposure to renewables or commitments to net zero/carbon neutral outcomes). We also prefer to target companies with experienced management teams, low financial leverage and disciplined capital expenditure spending plans, as these elements can contribute to positive free cash flow generation over time.
Utilities: 1.4% underweight (4.2% of the portfolio)
The portfolio currently invests in only two utility stocks and we have a slight underweight in the sector relative to the reference index. Portfolio exposures are stock specific as we are finding pockets of investment opportunity among U.S. regulated utilities, which add a level of stability and defensiveness to the portfolio through their durable earnings and dividend profiles. Our investments in the sector primarily focus on ESG leaders that have specific targets for reduction in carbon emissions and maintain significant exposure to renewables or generate power through cleaner means such as natural gas.
Communication Services: 2.9% underweight (4.4% of the portfolio)
The portfolio has an underweight to communication services. Our underweight is driven by expensive valuations and a lack of dividend payers in the entertainment and interactive media & services industries. Meanwhile, the portfolio is overweight to the diversified telecom services and wireless telecom services industries. Notable portfolio holdings include Verizon Communications (diversified telecom; 2.8% of the portfolio) and Rogers Communications (wireless telecom; 1.6% of the portfolio). Verizon Communications and Rogers Communications trade at reasonable valuations, boast strong competitive positions and rank well on ESG metrics versus peers. We also like that their core businesses, operating telecom networks, can be a key enabler of smart cities of the future, with potential to reduce energy consumption and provide other social benefits.
Consumer Staples: 1.9% underweight (5.4% of the portfolio)
The consumer staples sector is a common destination for the conservative equity income investor. Historically, many of these companies have offered investors recognisable brands, diverse revenue streams, exposure to growing end markets and the ability to garner pricing power. These characteristics, in turn, have translated into strong and often stable free cash flow and growing dividends for shareholders. In recent years, some of these secular advantages have become challenged, in our view, due to changing consumer preferences, greater end market competition from local brands and disruption from the rapid adoption of online shopping. These challenges, combined with higher than historical valuations, have facilitated our underweight positioning in the sector. Notable portfolio holdings include PepsiCo (2.6% of the portfolio). We held Lamb Weston Holdings during the year and exited the position before the year end. We view each of these businesses as ESG leaders: PepsiCo stands out for reducing its water usage and product carbon footprint and Lamb Weston is at the forefront of implementing strong corporate governance practices.
Real Estate: 3.2% underweight (1.3% of the portfolio)
The portfolio has an underweight allocation to real estate, as we are finding few companies in the sector with both attractive valuations and strong or improving fundamentals. For example, retail REITs are facing challenges due to e-commerce and its negative impact on traditional brick and mortar retailers. Meanwhile, data center and logistics companies have strong fundamentals, but we view their valuations as unattractive. Our only portfolio holding is CBRE Group (1.3% of the portfolio), the world’s largest commercial real estate services firm. The company is trading at a wide discount relative to peers and ranks well on ESG metrics versus peers. CBRE Group signed the Climate Pledge in 2021 to reach net zero by 2040.
Industrials: 4.9% underweight (5.5% of the portfolio)
The portfolio is meaningfully underweight to the industrials sector. Our selectivity is driven by relative valuations, which we view as expensive, in many cases, versus other cyclical value segments of the U.S. equity market. Notable positions include Komatsu (1.9% of the portfolio), a Japanese manufacturer of construction and mining equipment, and Norfolk Southern (1.7% of the portfolio), a major U.S. east coast railroad operator. We view both companies as ESG leaders in their respective domains. Komatsu has set meaningful targets for reduced CO2 emissions from its products by 2030 and to achieve carbon neutrality by 2050. Furthermore, Norfolk Southern provides us with exposure to a consolidated industry with pricing power that emits roughly one-third as much CO2 as trucks (the main shipping alternative), in moving an equivalent amount of cargo.
Market outlook
Investors and policymakers alike are finding themselves in quite an unusual and uncertain market environment. Over the past twelve months we have seen geopolitical tensions rise, rapid inflation, increased market volatility and the fastest pace of central bank tightening in decades. We believe elevated core inflation will linger for a while longer and a recession is to be expected across developed markets. In this vein, central banks are in a difficult position as they must address inflation but remain cognisant of growth at risk. While inflation seems to have finally stopped rising, it remains stubbornly elevated, but we believe inflation will inevitably drop in 2023 as commodity prices decline and energy and food inflation falls. Core goods inflation will decline as supply shortages decrease and shipping costs continue to fall. However, risks remain around price pressures in the service sector and central banks must stay ahead to curb long-term, high inflation.
Now, more than ever, is a time to be very cautious and strategic in portfolios. As a shallow recession is more likely than not, we can expect U.S. GDP to contract and unemployment to rise slightly. Further rate hikes are to be expected as the year progresses and as policymakers struggle with inflation running well above central bank targets. All told, we see potential downside risk for equity markets as companies will have to navigate a tumultuous market environment with slowing demand and cost pressures, ultimately leading to margin reduction. While we are conscious of the risks, we continue to favour high quality companies with strong balance sheets at reasonable valuations.
Tony DeSpirito, David Zhao and Lisa Yang
BlackRock Investment Management LLC
26 January 2023
TEN LARGEST INVESTMENTS
1 + Sanofi (2021: 12th)
Health Care
Market value: £5,175,000
Share of investments: 2.9% (2021: 2.3%)
ESG Leader
Sanofi is a French multinational pharmaceutical and health care company, and it operates in three segments including pharmaceuticals, vaccines and consumer health. Sanofi is a leader in diabetes, immunology and cardiovascular management and also maintains strong consumer brands such as Allegra, IcyHot, GoldBond and Rolaids. The company also has a wide portfolio of vaccines including a leading influenza vaccine business. While Sanofi has been subject to various inquiries around insulin pricing, this represents a diminishing part of the overall business as many of these drugs have seen rapidly declining prices due to generic competition. We believe Sanofi trades at a discount relative to peers with low exposure to US regulatory reform. With the newly appointed CEO who we know well from Novartis, we believe the company’s research & development and innovation track record can be turned around.
2 + Wells Fargo (2021: 4th)
Financials
Market value: £5,138,000
Share of investments: 2.9% (2021: 3.3%)
ESG Improver
Wells Fargo (WFC) is one of the largest U.S. banks and it operates in three segments including community banking, wholesale banking and wealth & investment management. WFC has a strong deposit franchise and we like its history of strong investment returns and prudent credit risk management. While WFC has a chequered history, we believe its current management team, led by CEO Charlie Scharf (hired in October 2019), can restore the firm’s reputation as a premiere community bank. Operational improvements require patience, but we believe that risk and control remediation as well as time-passed can ultimately improve WFC’s low social and governance scores. In summary, we view shares of the company as underappreciated today in an environment characterised by low credit losses and ample access to liquidity.
3 + Willis Towers Watson (2021: 29th)
Financials
Market value: £5,117,000
Share of investments: 2.9% (2021: 1.7%)
ESG Improver
Willis Towers Watson (WLTW) is a British-American multinational insurance advisor company. WLTW’s revenue breakdown is approximately 55% consulting related and 45% insurance brokerage related. Historically, WLTW has lagged its peers on margins and has had higher restructuring costs. We believe there is a margin improvement opportunity on the horizon, specifically in their insurance brokering related businesses. Additionally, WLTW’s valuation relative to peers is at historically wide levels. The board has seen many positive changes since late 2021 and we believe this will improve WLTW’s sustainability rating over time.
4 + Verizon Communications (2021: 14th)
Communication Services
Market value: £4,967,000
Share of investments: 2.8% (2021: 2.3%)
ESG Leader
Verizon Communications is the leading wireless company in the United States. We believe the company trades at a reasonable price relative to the quality and stability of the business due to competitive dynamics that have somewhat abated, as T-Mobile has pivoted to a margin growth strategy (from a share gain strategy). The company also has some optionality on new types of revenue enabled by 5th generation networks. Telecommunication networks can be key enablers for smart cities, with the potential to reduce energy consumption, increase safety and provide other social benefits.
5 – Cisco Systems (2021: 1st)
Information Technology
Market value: £4,935,000
Share of investments: 2.8% (2021: 4.0%)
ESG Leader
Cisco Systems is the world’s largest networking equipment vendor, with leading positions in most of its core end markets. As one of the largest suppliers of network security solutions, Cisco System’s products help customers to enhance data security and privacy. Despite market concerns regarding competition and Cloud migration, we believe they can still deliver sustainable revenue and earnings growth due to better than feared market positions, a diversified portfolio and a large existing installed base.
6 + Laboratory Corporation of America (2021: N/A)
Health Care
Market value: £4,909,000
Share of investments: 2.8% (2021: N/A)
ESG Leader
Laboratory Corporation of America, commonly known as LabCorp, operates in two segments including a low-cost, high quality national provider of laboratory services and a contract research organisation, which supports clinical research through administering trials and lab testing. LabCorp is able to offer high quality service at a materially lower cost due to scale. We believe LabCorp’s drug development business is underearning peers, which allows management to drive cost savings. Lastly, diagnostic testing is vital to generating positive health outcomes and LabCorp supports low-cost testing services, helping drive testing accessibility nationally.
7 + PepsiCo (2021: 18th)
Consumer Staples
Market value: £4,595,000
Share of investments: 2.6% (2021: 2.1%)
ESG Leader
PepsiCo is a multinational food, snack and beverage corporation with the majority of the profits stemming from their snacks business (75%). PepsiCo’s key brands include Lays, Doritos, Pepsi, Gatorade and Mountain Dew. Frito-Lay, a subsidiary of PepsiCo that manufactures corn chips, potato chips and other snack foods is one of the best assets in the packaged food industry. We believe Frito-Lay has the ability to sustainably grow ~5% in North America and ~8% in international markets where it remains underpenetrated. Lastly, PepsiCo is a leader within the consumer staples industry in managing its water and product carbon footprint, targeting a reduction in its carbon footprint across its value chain by 20% by 2030 and water use by 15% by 2025.
8 + Cigna (2021: 16th)
Health Care
Market value: £4,563,000
Share of investments: 2.6% (2021: 2.2%)
ESG Leader
Cigna is a multinational company that operates in two main segments including a traditional managed care business which operates a primarily fee-based commercial insurance business and a pharmacy benefit managers/health care services segment that provides pharmacy benefits and broader health care services to a wide variety of customers. We believe managed care companies play a substantial role in improving access and quality in health care to its members and in driving down costs to make health insurance affordable to more people. In 2015, Cigna became the first health services company to sign on to and commit to the UN Global Compact principles, which is a pact to encourage businesses and firms worldwide to adopt sustainable and socially responsible policies and to report on their implementation. Currently, Cigna is trading at a meaningful discount to peers and offers an attractive entry point to gain exposure to a high quality, double digits earnings compounder at a reasonable valuation.
9 – Cognizant Technology Solutions (2021: 5th)
Information Technology
Market value: £4,525,000
Share of investments: 2.6% (2021: 3.2%)
ESG Leader
Cognizant Technology Solutions is an IT Services company with a diversified revenue base across industry verticals and geographies. As a service provider, they help enterprise and small and medium business clients to transition to cloud infrastructure, which is more efficient versus sub-scale in-house data centers. The company also exhibits strong governance as evidenced by an independent chairman, an independent majority and a gender diverse board. After a period of market share loss and earnings guide-downs, we do not believe Cognizant Technology Solutions is structurally impaired. Rather, we see an attractive turnaround opportunity under CEO Brian Humphries who joined the firm in April 2019.
10 – American International (2021: 8th)
Financials
Market value: £4,474,000
Share of investments: 2.5% (2021: 2.9%)
ESG Leader
American International (AIG) is a diversified insurance company with exposure to both property & casualty and life insurance. AIG’s business model entails pooling and diversifying risk and this includes insuring against adverse events related to climate change such as floods, hurricanes, etc. New management at AIG has spent the past several years fixing a variety of operational issues at the firm. Notably, AIG has expanded margins, increased reserves, lowered expenses and better managed catastrophe losses via improved use of reinsurance. Despite these developments, the stock still trades at an underappreciated valuation.
All percentages reflect the value of the holding as a percentage of total investments.
Percentages in brackets represent the value of the holding as of 31 October 2021.
Together, the ten largest investments represent 27.4% of the Company’s portfolio (31 October 2021: 31.7%).
Investments as at 31 October 2022
Company | Country | Sector | Securities | Market value £’000 | % of total portfolio |
| Sanofi | France | Health Care | Ordinary shares | 5,175 | 2.9 |
| Wells Fargo | United States | Financials | Ordinary shares | 5,138 | 2.9 |
| Willis Towers Watson | United States | Financials | Ordinary shares | 5,117 | 2.9 |
| Verizon Communications | United States | Communication Services | Ordinary shares | 4,967 | 2.8 |
| Cisco Systems | United States | Information Technology | Ordinary shares | 4,935 | 2.8 |
| Laboratory Corporation of America | United States | Health Care | Ordinary shares | 4,909 | 2.8 |
| PepsiCo | United States | Consumer Staples | Ordinary shares | 4,595 | 2.6 |
| Cigna | United States | Health Care | Ordinary shares | 4,563 | 2.6 |
| Cognizant Technology Solutions | United States | Information Technology | Ordinary shares | 4,525 | 2.6 |
| American International | United States | Financials | Ordinary shares | 4,474 | 2.5 |
| Shell | United Kingdom | Energy | Ordinary shares | 4,466 | 2.5 |
| AstraZeneca | United Kingdom | Health Care | Ordinary shares | 4,412 | 2.5 |
| Citigroup | United States | Financials | Ordinary shares | 4,137 | 2.4 |
| General Motors | United States | Consumer Discretionary | Ordinary shares | 3,956 | 2.3 |
| Ralph Lauren | United States | Consumer Discretionary | Ordinary shares | 3,793 | 2.2 |
| Sempra | United States | Utilities | Ordinary shares | 3,685 | 2.1 |
| Fidelity National Information Services | United States | Information Technology | Ordinary shares | 3,659 | 2.1 |
| Cardinal Health | United States | Health Care | Ordinary shares | 3,623 | 2.1 |
| Public Service Enterprise Group | United States | Utilities | Ordinary shares | 3,617 | 2.1 |
| Humana | United States | Health Care | Ordinary shares | 3,565 | 2.0 |
| Anthem | United States | Health Care | Ordinary shares | 3,556 | 2.0 |
| Woodside Energy Group | Australia | Energy | Ordinary shares | 3,461 | 2.0 |
| Baxter International | United States | Health Care | Ordinary shares | 3,341 | 1.9 |
| Cheniere Energy | United States | Energy | Ordinary shares | 3,306 | 1.9 |
| Komatsu | Japan | Industrials | Ordinary shares | 3,293 | 1.9 |
| Microsoft | United States | Information Technology | Ordinary shares | 3,251 | 1.9 |
| Dollar Tree | United States | Consumer Discretionary | Ordinary shares | 3,244 | 1.8 |
| Comerica | United States | Financials | Ordinary shares | 3,145 | 1.8 |
| Norfolk Southern | United States | Industrials | Ordinary shares | 3,050 | 1.7 |
| JPMorgan Chase | United States | Financials | Ordinary shares | 3,026 | 1.7 |
| Panasonic | Japan | Consumer Discretionary | Ordinary shares | 2,926 | 1.7 |
| Western Digital | United States | Information Technology | Ordinary shares | 2,923 | 1.7 |
| Reckitt Benckiser Group | United Kingdom | Consumer Staples | Ordinary shares | 2,893 | 1.6 |
| Rogers Communications | Canada | Communication Services | Ordinary shares | 2,893 | 1.6 |
| Sealed Air | United States | Materials | Ordinary shares | 2,817 | 1.6 |
| Morgan Stanley | United States | Financials | Ordinary shares | 2,546 | 1.4 |
| Citizens Financial Group | United States | Financials | Ordinary shares | 2,478 | 1.4 |
| PPG Industries | United States | Materials | Ordinary shares | 2,476 | 1.4 |
| CBRE Group | United States | Real Estate | Ordinary shares | 2,258 | 1.3 |
| EQT | United States | Energy | Ordinary shares | 2,257 | 1.3 |
| Newmont | United States | Materials | Ordinary shares | 2,224 | 1.3 |
| Zebra Technologies | United States | Information Technology | Ordinary shares | 2,049 | 1.2 |
| Charles Schwab | United States | Financials | Ordinary shares | 2,047 | 1.2 |
| Kraft Heinz | United States | Consumer Staples | Ordinary shares | 2,036 | 1.2 |
| Prudential | United Kingdom | Financials | Ordinary shares | 1,978 | 1.1 |
| Newell Brands | United States | Consumer Discretionary | Ordinary shares | 1,909 | 1.1 |
| L3Harris Technologies | United States | Industrials | Ordinary shares | 1,830 | 1.0 |
| Visa | United States | Information Technology | Ordinary shares | 1,751 | 1.0 |
| Invesco | United States | Financials | Ordinary shares | 1,710 | 1.0 |
| Hess | United States | Energy | Ordinary shares | 1,699 | 1.0 |
| Novo Nordisk | Denmark | Health Care | Ordinary shares | 1,698 | 1.0 |
| Lear | United States | Consumer Discretionary | Ordinary shares | 1,641 | 0.9 |
| Robert Half | United States | Industrials | Ordinary shares | 1,639 | 0.9 |
| First American | United States | Financials | Ordinary shares | 1,448 | 0.8 |
| Fidelity National | United States | Financials | Ordinary shares | 1,351 | 0.8 |
| Ciena | United States | Information Technology | Ordinary shares | 989 | 0.6 |
| Eli Lilly | United States | Health Care | Ordinary shares | 975 | 0.6 |
| —————- | —————- | ||||
| Portfolio | 175,425 | 100.0 | |||
| ========== | ========== |
All investments are in ordinary shares unless otherwise stated. The number of holdings as at 31 October 2022 was 57 (31 October 2021: 54).
At 31 October 2022, the Company did not hold any equity interests comprising more than 3% of any company’s share capital.
DISTRIBUTION OF INVESTMENTS AS AT 31 OCTOBER 2022
| Total % | Reference Index % | |
| Communication Services | 4.4 | 7.3 |
| Consumer Discretionary | 10.0 | 6.1 |
| Consumer Staples | 5.4 | 7.3 |
| Energy | 8.7 | 8.8 |
| Financials | 21.9 | 20.3 |
| Health Care | 20.4 | 17.0 |
| Industrials | 5.5 | 10.4 |
| Information Technology | 13.9 | 8.6 |
| Materials | 4.3 | 4.1 |
| Real Estate | 1.3 | 4.5 |
| Utilities | 4.2 | 5.6 |
Sources: BlackRock and Datastream.
Environmental, Social and Governance issues and approach
The Board’s approach to ESG
The Board believes that responsible investment and sustainability are integral to the longer-term delivery of the Company’s success. The Board works closely with the Investment Manager regularly to review the Company’s performance, investment strategy and underlying policies to ensure that the Company’s investment objective continues to be met in an effective, responsible and sustainable way in the interests of shareholders and future investors.
The Board has been mindful of the increase in demand for investment products that place a sustainable investment philosophy at their core, a trend that has accelerated in recent years. Accordingly, the Company’s investment objective and investment policy incorporates a sustainable investment approach into the investment policy so that the Company is managed in a way which is compatible with the principles of sustainable investment adopted by the Company. In addition, one of the Company’s non-executive Directors has responsibility for sustainability, working alongside the rest of the Board and the Investment Manager.
The Company promotes environmental or social characteristics under the EU Sustainable Finance Disclosure Regulation (SFDR) and is classified as an Article 8 product. Further detail around how the Company has achieved these characteristics and objectives, is included in the sustainability-related disclosures supplementary section to the Annual Report.
BlackRock Sustainable American Income Trust plc – BlackRock Investment Stewardship Engagement with portfolio companies for the year ended 31 October 2022
The Company’s portfolio is managed by the Fundamental Equities division of BlackRock’s Portfolio Management Group which consists of 28 investment professionals. The team engages with company management teams and undertakes company meetings to identify the best management teams in the region with the ability to create value for shareholders over the long term. In addition, BlackRock also has a separate BlackRock Investment Stewardship (BIS) team. Consistent with BlackRock’s fiduciary duty as an asset manager, BIS seeks to support investee companies in their efforts to deliver long-term durable financial performance on behalf of BlackRock’s clients. BIS engages with investee companies to build its understanding of these companies’ approach to addressing material business risks and opportunities. For the year to 31 October 2022, BIS held 86 company engagements on a range of governance issues with the management teams of 43 companies in the BlackRock Sustainable American Income Trust plc portfolio, representing 74% of the portfolio by value at 31 October 2022. Additional information is set out in the table and charts below, as well as the key engagement themes for the meetings held in respect of the Company’s portfolio holdings.
| Year ended 31 October 2022 | |
| Number of engagements held1 | 86 |
| Number of companies met1 | 43 |
| % of equity investments covered2 | 74.0 |
| Shareholder meetings voted at1 | 50 |
| Number of proposals voted on1 | 715 |
| Number of votes against management1 | 64 |
| % of total items voted represented by votes against management | 1.7 |
1 Source: Institutional Shareholder Services as at 31 October 2022.
2 Source: BlackRock. Company valuation as included in the portfolio at 31 October 2022 as a percentage of the total portfolio value.
ENGAGEMENT THEMES1
| Governance | 41% |
| Social | 24% |
| Environmental | 35% |
ENVIRONMENTAL ENGAGEMENT THEMES
| Climate Risk Management | 49% |
| Environmental Impact Management | 20% |
| Operational Sustainability | 24% |
| Other | 7% |
SOCIAL ENGAGMENT THEMES
| Human Capital Management | 50% |
| Social Risks and Opportunities | 39% |
| Other | 11% |
GOVERNANCE ENGAGEMENT THEMES
| Board Composition and Effectiveness | 21% |
| Board Gender Diversity | 1% |
| Business Oversight/Risk Management | 11% |
| Corporate Strategy | 25% |
| Executive Management | 6% |
| Governance Structure | 6% |
| Remuneration | 24% |
| Sustainability Reporting | 5% |
1 Engagements are with investee companies. Sources: ISS Proxy Exchange and BlackRock Investment Stewardship.
Engagements with investee companies
Case study: Integration of sustainability- related criteria in compensation policies
General Motors
Following the 2021 AGM of General Motors, a U.S. automobile manufacturer, at which the BlackRock Investment Stewardship team (BIS) supported management on pay, we discussed with management how they might enhance their compensation disclosures. In BIS’s view, there was an opportunity for the company to articulate better their strategic pivot to electric vehicles (EV) and how it was being factored into future compensation decisions. Per the company’s 2022 proxy statement, General Motors responded to shareholder feedback and provided additional detail on the goal setting process for the short-term incentive plan. The company also made changes to the design of the long- term plan, adding “Electric Vehicle financial performance measures that reward performance” among other adjustments. BIS subsequently supported the company’s Say on Pay proposal at the June 2022 AGM, which received 92.3% shareholder support.
Case study: Voting on climate-related shareholder proposals
Woodside
Woodside Petroleum Ltd. (Woodside) is an Australian oil and natural gas company. At the company’s May 2022 AGM, BIS supported two management proposals, among others, seeking shareholder approval of a merger with BHP Petroleum and of the company’s 2021 Climate Report which outlines the company’s view of climate risk and their energy transition strategy. The merger with BHP’s oil and gas business would increase the likelihood of further development of natural gas projects in Australia, which have been scrutinized by activist groups. BIS discussed these issues with Woodside and sought to understand their long-term views on climate risk management, particularly as it relates to these projects. BIS had concerns in 2021 about the comprehensiveness of the company’s climate risk management and target setting. This year’s engagement reassured BIS that the company is focused on meeting its energy transition commitments even with this gas project expansion. At the 2022 AGM, BIS did not support several shareholder proposals that it felt were overly prescriptive and risked unduly restricting management’s ability to make business decisions. BIS will continue to engage with Woodside and will discuss management’s views on the role that the company plays in the transition to a decarbonized economy, among other issues that we believe contribute to Woodside’s ability to deliver durable, long-term shareholder returns.
Case study: Supporting management proposals to approve the company’s climate action plans
Shell
At Shell Plc’s (Shell) May 2022 AGM, management proposed an advisory, non-binding shareholder vote on the progress made to date against the company’s Energy Transition Strategy. BIS supported this proposal in recognition of the company’s disclosed energy transition plan to manage climate-related risks and opportunities and the company’s progress against this strategy. BIS did not support a shareholder proposal requesting that the company set and publish targets that are consistent with the goal of the Paris Climate Agreement to limit global warming to well below 2°C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5°C. BIS believed that it was not additive to Shell’s Energy Transition Strategy and that the company’s ability to set absolute short-and medium-term scope 3 emissions reduction targets was impeded by the current uncertainty around the pace of declines in oil and gas demand as well as energy security considerations.
Sustainable investing: BlackRock’s approach
BlackRock believes that sustainability risk – and climate risk in particular – equates to investment risk, and this will drive a profound reassessment of risk and asset values as investors seek to react to the impact of climate policy changes. This in turn, in BlackRock’s view, is likely to drive a significant reallocation of capital away from traditional carbon intensive industries over the next decade. BlackRock believes that carbon-intensive companies will play an integral role in unlocking the full potential of the energy transition, and to do this, they must be prepared to adapt, innovate and pivot their strategies towards a low carbon economy.
As part of BlackRock’s structured investment process, ESG risks and opportunities (including sustainability/climate risk) are considered within the portfolio management team’s fundamental analysis of companies and industries and the Company’s portfolio managers work closely with BIS to assess the governance quality of companies and understand any potential issues, risks or opportunities.
As part of their approach to ESG integration, the portfolio managers use ESG information when conducting research and due diligence on new investments and again when monitoring investments in the portfolio. In particular, portfolio managers at BlackRock now have access to 1,200 key ESG performance indicators in Aladdin (BlackRock’s proprietary trading system) from third-party data providers. BlackRock’s internal sustainability research framework scoring is also available alongside third-party ESG scores in core portfolio management tools. BlackRock’s analysts’ sector expertise and local market knowledge allows it to engage with companies through direct interaction with management teams and conducting site visits. In conjunction with the portfolio management team, BIS meets with boards of companies frequently to evaluate how they are strategically managing their longer-term issues, including those surrounding ESG and the potential impact these may have on company financials. BIS’s and the portfolio management team’s understanding of ESG issues is further supported by BlackRock’s Sustainable and Transition Solutions (STS) function. STS looks to advance ESG research and integration, active engagement and the development of sustainable investment solutions across the firm.
Investment stewardship
Consistent with BlackRock’s fiduciary duty as an asset manager, BIS seeks to support investee companies in their efforts to deliver long-term durable financial performance on behalf of our clients. These clients include public and private pension plans, governments, insurance companies, endowments, universities, charities and, ultimately, individual investors, among others. BIS serves as an important link between BlackRock’s clients and the companies they invest in. Clients depend on BlackRock to help them meet their investment goals; the business and governance decisions that companies make will have a direct impact on BlackRock’s clients’ long-term investment outcomes and financial well-being.
Global principles
BlackRock’s approach to corporate governance and stewardship is comprised in BIS’ Global Principles and market-specific voting guidelines. BIS’ policies set out the core elements of corporate governance that guide its investment stewardship activities globally and within each regional market, including when voting at shareholder meetings for those clients who have authorised BIS to vote on their behalf. Each year, BIS reviews its policies and updates them as necessary to reflect changes in market standards and regulations, insights gained over the year through third-party and its own research, and feedback from clients and companies. BIS’ Global Principles are available on its website at https://www.blackrock.com/corporate/literature/fact-sheet/blk-responsible-investment- engprinciples-global.pdf.
Market-specific proxy voting guidelines
BIS’ voting guidelines are intended to help clients and companies understand its thinking on key governance matters. They are the benchmark against which it assesses a company’s approach to corporate governance and the items on the agenda to be voted on at a shareholder meeting. BIS applies its guidelines pragmatically, taking into account a company’s unique circumstances where relevant. BlackRock informs voting decisions through research and engages as necessary. BIS reviews its voting guidelines annually and updates them as necessary to reflect changes in market standards, evolving governance practice and insights gained from engagement over the prior year. BIS’ market-specific voting guidelines are available on its website at www.blackrock.com/corporate/about-us/ investment-stewardship#stewardship-policies.
BlackRock is committed to transparency in terms of disclosure on its stewardship activities on behalf of clients. BIS publishes its stewardship policies – such as the Global Principles, engagement priorities, and voting guidelines – to help BlackRock’s clients understand its work to advance their interests as long-term investors in public companies. Additionally, BIS publishes both annual and quarterly reports detailing its stewardship activities, as well as vote bulletins that describe its rationale for certain votes at high profile shareholder meetings. More detail in respect of BIS reporting can be found at www.blackrock.com/corporate/about-us/ investment-stewardship.
BlackRock’s reporting and disclosures
In terms of its own reporting, BlackRock believes that the Sustainability Accounting Standards Board provides a clear set of standards for reporting sustainability information across a wide range of issues, from labour practices to data privacy to business ethics. For evaluating and reporting climate-related risks, as well as the related governance issues that are essential to managing them, the Task Force on Climate-related Financial Disclosures (TCFD) provides a valuable framework.
BlackRock recognises that reporting to these standards requires significant time, analysis, and effort. BlackRock’s 2021 TCFD report can be found at www.blackrock. com/corporate/literature/continuous-disclosure-and- importantinformation/tcfd-report-2021-blkinc.pdf.
Strategic Report
The Directors present the Strategic Report of the Company for the year ended 31 October 2022. The aim of the Strategic Report is to provide shareholders with the information to assess how the Directors have performed their duty to promote the success of the Company for the collective benefit of shareholders.
The Chair’s Statement together with the Investment Manager’s Report form part of this Strategic Report. The Strategic Report was approved by the Board at its meeting on 26 January 2023.
Principal activity
The Company carries on business as an investment trust and has a premium listing on the London Stock Exchange. Its principal activity is portfolio investment. Investment trusts are pooled investment vehicles which allow exposure to a diversified range of assets through a single investment, thus spreading investment risk.
Investment objective
The Company’s objective is to provide an attractive level of income return together with capital appreciation over the long term in a manner consistent with the principles of sustainable investing adopted by the Company.
Strategy, business model and investment policy
Strategy
The Company invests in accordance with the objective given above. The Board is collectively responsible to shareholders for the long-term success of the Company and is its governing body. There is a clear division of responsibility between the Board and BlackRock Fund Managers Limited (the Manager). Matters reserved for the Board include setting the Company’s strategy, including its investment objective and policy, setting limits on gearing, capital structure, governance, and appointing and monitoring performance of service providers, including the Manager.
Business model
The Company’s business model follows that of an externally managed investment trust. Therefore, the Company does not have any employees and outsources its activities to third-party service providers including the Manager who is the principal service provider. In accordance with the Alternative Investment Fund Managers’ Directive (AIFMD) the Company is an Alternative Investment Fund (AIF). BlackRock Fund Managers Limited is the Company’s Alternative Investment Fund Manager.
The management of the investment portfolio and the administration of the Company have been contractually delegated to the Manager who in turn (with the permission of the Company) has delegated certain investment management and other ancillary services to BlackRock Investment Management (UK) Limited (the Investment Manager or BIM (UK)). The Manager, operating under guidelines determined by the Board, has direct responsibility for the decisions relating to the day-to-day running of the Company and is accountable to the Board for the investment, financial and operating performance of the Company.
The Company delegates fund accounting services to the Manager, which in turn sub-delegates these services to The Bank of New York Mellon (International) Limited (BNYM). Other service providers include the Depositary (also BNYM) and the Registrar, Computershare Investor Services PLC. Details of the contractual terms with the Manager and the Depositary and more details of arrangements in place governing custody services are set out in the Directors’ Report in the Company’s Annual Report for the year ended 31 October 2022.
Investment policy
The Company invests primarily in a diversified portfolio of North American* equity securities, with a focus on large-cap and medium-cap companies that pay and grow their dividends. ‘North America’, in accordance with the United Nations publication ‘Standard Country or Area Codes for Statistical Use’, means Bermuda, Canada, Greenland, Saint Pierre and Miquelon and United States of America and ‘North American’ shall be construed accordingly. The Company may also invest in the equity securities of companies outside North America, subject to the restrictions set out below, and may invest in securities denominated in currencies other than the official currencies of the relevant countries or areas within North America. The Company may also hold other securities from time-to-time including, inter alia, options, futures contracts, convertible securities, fixed interest securities, preference shares, non-convertible preferred stock and depositary receipts (such securities other than equity securities, together ‘Other Securities’). The Company may also write covered call options in respect of its portfolio.
To achieve the Company’s investment objective, the Investment Manager adopts a stock specific approach in managing the Company’s portfolio, selecting investments that it believes will both increase in value over the long term and provide income. The Company does not invest in companies which are not listed, quoted or traded on an exchange at the time of investment, although it may have exposure to such companies where, following investment, the relevant securities cease to be listed, quoted or traded on an exchange. Typically, it is expected that the investment portfolio will comprise between 30 and 60 equity securities. As at 31 October 2022, there were 57 holdings in the Company’s portfolio.
The Company may invest in derivatives for efficient portfolio management and in options for investment purposes and may, for investment purposes, write covered call options in respect of its portfolio. Any use of derivatives for efficient portfolio management and/or options for investment purposes is made based on the same principles of risk spreading and diversification that apply to the Company’s direct investments. For the avoidance of doubt, the Company does not enter into physical or synthetic short positions or write any uncovered options.
Portfolio risk is mitigated by investing in a diversified spread of investments. In particular, the Company observes the following investment restrictions: no single investment (including for the avoidance of doubt, any single derivative instrument) at the time of investment, shall account for more than 10% of the gross asset value of the Company; no more than 25% of the gross asset value of the Company, at the time of investment, shall be invested in securities which are not deemed to be North American* securities; no more than 35% of the gross asset value of the Company, at the time of investment, shall be exposed to any one sector; no more than 20% of the gross asset value of the Company, at the time of investment, shall be invested in Other Securities; and no more than 20% of the Company’s portfolio will be under option at any given time. (*Securities may be deemed to be North American securities if: (i) the company’s principal operations are conducted from North America; or (ii) the company’s equity securities are listed, quoted or traded on a North American stock exchange; or (iii) the company does a substantial amount of business in North America; or (iv) the issuer of securities is included in the Company’s reference index.)
In managing the Company’s portfolio, the Investment Manager, in addition to other investment criteria, takes into account the environmental, social and governance (ESG) characteristics of the relevant issuers of securities and seeks to deliver a superior ESG outcome versus the reference index by aiming for the Company’s portfolio to achieve: (i) a better ESG score than the reference index; and (ii) a lower carbon emissions intensity score than the reference index. The reference index is the Russell 1000 Value Index, or such other index as may be agreed by the Company and the Investment Manager to be appropriate from time to time. However, there can be no guarantee that these aims will be achieved and the ESG rating of the Company’s portfolio and its carbon emission intensity score may vary.
The Investment Manager also applies a screening policy (currently the BlackRock EMEA Baseline Screens policy) at the time of investment through which it seeks to limit and/or exclude direct investment (as applicable) in companies which, in the opinion of the Investment Manager, have exposure to, or ties with, certain sectors (in some cases subject to specific revenue thresholds) including but not limited to: (i) the production of certain types of controversial weapons; (ii) the distribution or production of firearms or small arms ammunition intended for retail civilians; (iii) the extraction of certain types of fossil fuel and/or the generation of power from them; (iv) the production of tobacco products or certain activities in relation to tobacco-related products; and (v) issuers which have been deemed to have failed to comply with United Nations Global Compact Principles.
Following application of the screening policy outlined above, those companies which have not yet been excluded from investment are then evaluated by the Investment Manager based on their ability to manage the risks and opportunities associated with ESG-consistent business practices and their ESG risk and opportunity credentials, such as their leadership and governance framework, which is considered essential for sustainable growth, their ability to strategically manage longer-term issues surrounding ESG and the potential impact this may have on a company’s financials. To undertake the required analyses, the Investment Manager may use data provided by external ESG data providers, proprietary models and local intelligence and may undertake site visits.
Should holdings which are compliant with the screening policy applied by the Investment Manager outlined above at the time of investment subsequently become ineligible, they will be divested within a reasonable period of time. The Company may gain limited exposure (including, but not limited to, through investment in other listed closed-ended investment funds and derivatives) to issuers with exposures that do not meet the sustainable investment principles described above. Circumstances in which such exposure may arise include, but are not limited to, where a counterparty to a derivative in which the Company invests posts collateral which is inconsistent with the Company’s sustainable investment principles or where a fund in which the Company invests does not apply any or the same sustainable investment principles as the Company and so provides exposure to securities which are inconsistent with the Company’s sustainable investment principles. The Investment Manager may take corrective action in such circumstances.
The Company may borrow up to 20 per cent of its net asset value (calculated at the time of draw down), although typically borrowings are not expected to exceed 10 per cent of its net asset value at the time of draw down. Borrowings may be used for investment purposes. The Company has entered into an overdraft facility for this purpose. The Company may enter into interest rate hedging arrangements.
The Company’s foreign currency investments are not hedged to Sterling as a matter of general policy. However, the investment team may employ currency hedging, either back to Sterling or between currencies (i.e. cross-hedging of portfolio investments).
In order to comply with the current Listing Rules, the Company also complies with the following investment restrictions (which do not form part of the Company’s investment policy): the Company will not conduct any trading activity which is significant in the context of its group as a whole; and the Company will not invest more than 10% of its gross asset value in other listed closed-ended investment funds, whether managed by the Investment Manager or not, except that this restriction shall not apply to investments in listed closed-ended investment funds which themselves have stated investment policies to invest no more than 15% of their gross assets in other listed closed-ended investment funds.
Information regarding the Company’s investment exposures is contained within the schedule of investments in the Company’s Annual Report for the year ended 31 October 2022. Further information regarding investment risk and activity throughout the year can be found in the Investment Manager’s Report.
No material change will be made to the investment policy without the approval of shareholders by ordinary resolution.
Environmental impact
The direct impact of the Company’s activities is minimal as it has no employees, premises, physical assets or operations either as a producer or a provider of goods or services. Neither does it have customers. Its indirect impact occurs through the investments that it makes and this is mitigated through BlackRock’s environmental, social and governance policies.
Performance
Over the year ended 31 October 2022, the Company’s net asset value returned +7.4% compared with a return of +10.7% in the Russell 1000 Value Index. The ordinary share price returned +3.6% (all percentages are calculated in Sterling terms with dividends reinvested). The Investment Manager’s Report includes a review of the main developments during the year, together with information on investment activity within the Company’s portfolio.
Results and dividends
The results for the Company are set out in the Statement of Comprehensive Income. The total return for the year, after taxation, was a profit of £12,170,000 (2021: profit of £44,734,000) of which the revenue return amounted to a profit of £3,081,000 (2021: £3,248,000) and the capital return amounted to a profit of £9,089,000 (2021: profit of £41,486,000).
The Company pays dividends quarterly. Four quarterly interim dividends of 2.00p per share were paid on 29 April 2022, 1 July 2022, 3 October 2022 and 3 January 2023. Total dividends of 8.00p per share were paid or declared in the year ended 31 October 2022 (2021: 8.00p).
Future prospects
The Board’s main focus is to provide an attractive level of income together with capital appreciation over the long term in a manner consistent with the principles of sustainable investing. The future of the Company is dependent upon the success of the investment strategy. The outlook for the Company in the next twelve months is discussed in both the Chair’s Statement and in the Investment Manager’s Report.
Social, community and human rights issues
As an investment trust, the Company has no direct social or community responsibilities or impact on the environment. However, the Directors believe that it is important and in shareholders’ interests to consider human rights issues and environmental, social and governance factors when selecting and retaining investments. Details of the Company’s approach on socially responsible investment are set out in the Company’s Annual Report for the year ended 31 October 2022.
Modern Slavery Act
As an investment vehicle, the Company does not provide goods or services in the normal course of business and does not have customers. The Investment Manager considers modern slavery as part of supply chains and labour management within the investment process. Accordingly, the Directors consider that the Company is not required to make any slavery or human trafficking statement under the Modern Slavery Act 2015. In any event, the Board considers the Company’s supply chains, dealing predominantly with professional advisers and service providers in the financial services industry, to be low risk in relation to this matter.
Directors, gender representation and employees
The Directors of the Company on 31 October 2022 are set out in the Directors’ Biographies in the Company’s Annual Report for the year ended 31 October 2022. The Board consists of two male Directors and two female Directors. The Company does not have any executive employees.
Key performance indicators
At each Board meeting, the Directors consider a number of performance measures to assess the Company’s success in achieving its objectives. The key performance indicators (KPIs) used to measure the progress and performance of the Company over time, and which are comparable to other investment trusts, are set out in the following table. As indicated in the footnote to the table, some of these KPIs fall within the definition of ‘Alternative Performance Measures’ under guidance issued by the European Securities and Markets Authority (ESMA) and additional information explaining how these are calculated is set out in the Glossary in the Company’s Annual Report for the year ended 31 October 2022.
Additionally, the Board regularly reviews the performance of the portfolio, as well as the net asset value and share price of the Company and compares this against various companies and indices. The Board also reviews the performance of the portfolio against a reference index, the Russell 1000 Value Index. Information on the Company’s performance is given in the Chair’s Statement.
| Year ended 31 October 2022 | Year ended 31 October 2021 | |
| Net asset value per ordinary share | 213.25p | 206.08p |
| Ordinary share price (mid-market) | 197.50p | 198.25p |
| Net asset value total return1 | +7.4% | +36.0% |
| Reference index2 | +10.7% | +35.6% |
| Share price total return1 | +3.6% | +42.4% |
| Dividends per share | 8.00p | 8.00p |
| Discount to cum income net asset value3 | 7.4% | 3.8% |
| Revenue return per share | 3.84p | 4.06p |
| Ongoing charges4 | 1.01% | 1.06% |
| ========== | ========== |
1 This measures the Company’s share price and NAV total return, which assumes dividends paid by the Company have been reinvested.
2 Russell 1000 Value Index, total return basis.
3 This is the difference between the share price and the NAV per share with debt at par. It is an indicator of the need for shares to be bought back or, in the event of a premium to NAV per share, issued.
4 Ongoing charges represent the management fee and all other operating expenses excluding finance costs, direct transaction costs, custody transaction charges, VAT recovered, taxation, prior year expenses written back and certain non-recurring items as a % of average daily net assets.
Principal risks
The Company is exposed to a variety of risks and uncertainties. As required by the 2018 UK Corporate Governance Code (the UK Code), the Board has put in place a robust ongoing process to identify, assess and monitor the principal and emerging risks facing the Company, including those that would threaten its business model. A core element of this process is the Company’s risk register which identifies the risks facing the Company and assesses the likelihood and potential impact of each risk and the quality of controls operating to mitigate it. A residual risk rating is then calculated for each risk based on the outcome of the assessment.
The risk register, its method of preparation and the operation of key controls in BlackRock’s and third-party service providers’ systems of internal control, are reviewed on a regular basis by the Audit and Management Engagement Committee. In order to gain a more comprehensive understanding of BlackRock’s and other third-party service providers’ risk management processes and how these apply to the Company’s business, BlackRock’s internal audit department provides an annual presentation to the Audit Committee chairs of the BlackRock investment trusts setting out the results of testing performed in relation to BlackRock’s internal control processes. The Audit and Management Engagement Committee also periodically receives and reviews internal control reports from BlackRock and the Company’s service providers.
The Board has undertaken a robust assessment of both the principal and emerging risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity. The COVID-19 pandemic has given rise to unprecedented challenges for businesses across the globe. Additionally, the risk that unforeseen or unprecedented events including (but not limited to) heightened geo-political tensions such as the war in Ukraine, high inflation and the current cost of living crisis has had a significant impact on global markets. The Board has taken into consideration the risks posed to the Company by these events and incorporated these into the Company’s risk register. The threat of climate change has also reinforced the importance of more sustainable practices and environmental responsibility.
Emerging risks are considered by the Board as they come into view and are incorporated into the existing review of the Company’s risk register. Additionally, the Manager considers emerging risks in numerous forums and the Risk and Quantitative Analysis team produces an annual risk survey. Any material risks of relevance to the Company identified through the annual risk survey will be communicated to the Board.
The Board will continue to assess these risks on an ongoing basis. In relation to the UK Code, the Board is confident that the procedures that the Company has put in place are sufficient to ensure that the necessary monitoring of risks and controls has been carried out throughout the reporting period.
The principal risks and uncertainties faced by the Company during the financial year, together with the potential effects, controls and mitigating factors are set out in the following table.
| Principal Risk | Mitigation/Control |
| Counterparty The potential loss that the Company could incur if a counterparty is unable (or unwilling) to perform on its commitments. | Due diligence is undertaken before contracts are entered into and exposures are diversified across a number of counterparties. The Depositary is liable for restitution for the loss of financial instruments held in custody unless able to demonstrate the loss was a result of an event beyond its reasonable control. |
| Investment performance Returns achieved are reliant primarily upon the performance of the portfolio. The Board is responsible for: · deciding the investment strategy to fulfil the Company’s objective; and · monitoring the performance of the Investment Manager and the implementation of the investment strategy. An inappropriate investment policy may lead to: · underperformance compared to the reference index; · a reduction or permanent loss of capital; and · dissatisfied shareholders and reputational damage. | To manage this risk the Board: · regularly reviews the Company’s investment mandate and long-term strategy; · has set investment restrictions and guidelines which the Investment Manager monitors and regularly reports on; · receives from the Investment Manager a regular explanation of stock selection decisions, portfolio exposure, gearing and any changes in gearing and the rationale for the composition of the investment portfolio; · monitors and maintains an adequate spread of investments in order to minimise the risks associated with particular countries or factors specific to particular sectors, based on the diversification requirements inherent in the investment policy; and · receives and reviews regular reports showing an analysis of the Company’s performance against the Russell 1000 Value Index and other similar indices. |
| Legal & Regulatory Compliance The Company has been approved by HM Revenue & Customs as an investment trust, subject to continuing to meet the relevant eligibility conditions, and operates as an investment trust in accordance with Chapter 4 of Part 24 of the Corporation Tax Act 2010. As such, the Company is exempt from corporation tax on capital gains on the profits realised from the sale of its investments. Any breach of the relevant eligibility conditions could lead to the Company losing investment trust status and being subject to corporation tax on capital gains realised within the Company’s portfolio. In such event, the investment returns of the Company may be adversely affected. A serious regulatory breach could result in the Company and/or the Directors being fined or the subject of criminal proceedings, or the suspension of the Company’s shares which would in turn lead to a breach of the Corporation Tax Act 2010. Amongst other relevant laws, the Company is required to comply with the provisions of the Companies Act 2006, the Alternative Investment Fund Managers’ Directive, the UK Listing Rules, Disclosure Guidance and Transparency Rules, the Sanctions and Anti-Money Laundering Act 2018 and the Market Abuse Regulation. | The Investment Manager monitors investment movements, the level of forecast income and expenditure and the amount of proposed dividends to ensure that the provisions of Chapter 4 of Part 24 of the Corporation Tax Act 2010 are not breached. The results are reported to the Board at each meeting. Compliance with the accounting rules affecting investment trusts is also carefully and regularly monitored. The Company Secretary, Manager and the Company’s professional advisers provide regular reports to the Board in respect of compliance with all applicable rules and regulations. The Board and Manager also monitor changes in government policy and legislation which may have an impact on the Company. |
| Market Market risk arises from volatility in the prices of the Company’s investments. It represents the potential loss the Company might suffer through realising investments in the face of negative market movements. Changes in general economic and market conditions, such as currency exchange rates, interest rates, rates of inflation, industry conditions, tax laws, political events and trends can also substantially and adversely affect the securities and, as a consequence, the Company’s prospects and share price. Market risk includes the potential impact of events which are outside the Company’s control, including (but not limited to) heightened geo-political tensions and military conflict, a global pandemic and high inflation. Companies operating in sectors in which the Company invests may be impacted by new legislation governing climate change and environmental issues, which may have a negative impact on their valuation and share price. | The Board considers the diversification of the portfolio, asset allocation, stock selection and levels of gearing on a regular basis and has set investment restrictions and guidelines which are monitored and reported on by the Investment Manager. The Board monitors the implementation and results of the investment process with the Investment Manager. The Board also recognises the benefits of a closed-end fund structure in extremely volatile markets such as those experienced as a consequence of the COVID-19 pandemic, and more recently the conflict in Ukraine. Unlike open-ended counterparts, closed-end funds are not obliged to sell-down portfolio holdings at low valuations to meet liquidity requirements for redemptions. During times of elevated volatility and market stress, the ability of a closed-end fund structure to remain invested for the long term enables the Portfolio Managers to adhere to disciplined fundamental analysis from a bottom-up perspective and be ready to respond to dislocations in the market as opportunities present themselves. The Portfolio Managers spend a considerable amount of time understanding the ESG risks and opportunities facing investee companies and conduct research and due diligence on new investments and when monitoring investments in the portfolio. |
| Operational In common with most other investment trust companies, the Company has no employees. The Company therefore relies on the services provided by third parties and is dependent on the control systems of the Manager, the Depositary and Fund Accountant, which maintain the Company’s assets, dealing procedures and accounting records. The security of the Company’s assets, dealing procedures, accounting records and adherence to regulatory and legal requirements depend on the effective operation of the systems of these other third-party service providers. There is a risk that a major disaster, such as floods, fire, a global pandemic, or terrorist activity, renders the Company’s service providers unable to conduct business at normal operating effectiveness. Failure by any service provider to carry out its obligations could have a material adverse effect on the Company’s performance. Disruption to the accounting, payment systems or custody records (including cyber security risk) could prevent the accurate reporting and monitoring of the Company’s financial position. | Due diligence is undertaken before contracts are entered into with third-party service providers. Thereafter, the performance of the provider is subject to regular review and reported to the Board. The Board reviews on a regular basis an assessment of the fraud risks that the Company could potentially be exposed to and also a summary of the controls put in place by the Manager, Depositary, Custodian, Fund Accountant and Registrar specifically to mitigate these risks. Most third-party service providers produce Service Organisation Control (SOC 1) reports to provide assurance regarding the effective operation of internal controls as reported on by their reporting accountants. These reports are provided to the Audit and Management Engagement Committee for review. The Committee would seek further representations from service providers if not satisfied with the effectiveness of their control environment. The Company’s financial instruments held in custody are subject to a strict liability regime and, in the event of a loss of such financial instruments held in custody, the Depositary must return financial instruments of an identical type or the corresponding amount, unless able to demonstrate the loss was a result of an event beyond its reasonable control. The Board reviews the overall performance of the Manager, Investment Manager and all other third-party service providers on a regular basis and compliance with the Investment Management Agreement annually. The Board also considers the business continuity arrangements of the Company’s key service providers on an ongoing basis and reviews these as part of its review of the Company’s risk register. |
| Financial The Company’s investment activities expose it to a variety of financial risks which include market risk, counterparty credit risk, liquidity risk and the valuation of financial instruments. | Details of these risks are disclosed in note 15 to the Financial Statements in the Company’s Annual Report for the year ended 31 October 2022, together with a summary of the policies for managing these risks. |
| Marketing Marketing efforts are inadequate or do not comply with relevant regulatory requirements. There is a failure to communicate adequately with shareholders or reach out to potential new shareholders resulting in reduced demand for the Company’s shares and a widening of the discount. | The Board reviews marketing strategy and initiatives and the Manager is required to provide regular updates on progress. BlackRock has a dedicated investment trust sales team visiting both existing and potential clients on a regular basis. The Manager also devotes considerable resources marketing to self-directed private investors. Data on client meetings and issues raised are provided to the Board on a regular basis. All investment trust marketing documents are subject to appropriate review and authorisation. |
Section 172 statement: Promoting the success of the Company
The Companies (Miscellaneous Reporting) Regulations 2018 require directors to explain in greater detail how they have discharged their duties under Section 172(1) of the Companies Act 2006 in promoting the success of their companies for the benefit of members as a whole. This includes the likely consequences of their decisions in the longer term and how they have taken wider stakeholders’ needs into account.
The disclosure that follows covers how the Board has engaged with and understands the views of stakeholders and how stakeholders’ needs have been taken into account, the outcome of this engagement and the impact that it has had on the Board’s decisions. The Board considers the main stakeholders in the Company to be the Manager, Investment Manager and the shareholders. In addition to this, the Board considers investee companies and key service providers of the Company to be stakeholders; the latter comprise the Company’s Custodian, Depositary, Registrar and Broker.
Stakeholders
| Shareholders | Manager and Investment Manager | Other key service providers | Investee companies |
| Continued shareholder support and engagement are critical to the continued existence of the Company and the successful delivery of its long-term strategy. The Board is focused on fostering good working relationships with shareholders and on understanding the views of shareholders in order to incorporate them into the Board’s strategy and objectives in delivering an attractive level of income return together with capital appreciation over the long term in a manner consistent with the principles of sustainable investing adopted by the Company. | The Board’s main working relationship is with the Manager, who is responsible for the Company’s portfolio management (including asset allocation, stock and sector selection) and risk management, as well as ancillary functions such as administration, secretarial, accounting and marketing services. The Manager has sub-delegated portfolio management to the Investment Manager. Successful management of shareholders’ assets by the Investment Manager is critical for the Company to successfully deliver its investment strategy and meet its objective. The Company is also reliant on the Manager as AIFM to provide support in meeting relevant regulatory obligations under the AIFMD and other relevant legislation. | In order for the Company to function as an investment trust with a listing on the premium segment of the official list of the Financial Conduct Authority and trade on the London Stock Exchange’s (LSE) main market for listed securities, the Board relies on a diverse range of advisors for support in meeting relevant obligations and safeguarding the Company’s assets. For this reason, the Board considers the Company’s Custodian, Depositary, Registrar and Broker to be stakeholders. The Board maintains regular contact with its key external service providers and receives regular reporting from them through the Board and Committee meetings, as well as outside of the regular meeting cycle. | Portfolio holdings are ultimately shareholders’ assets and the Board recognises the importance of good stewardship and communication with investee companies in meeting the Company’s investment objective and strategy. The Board monitors the Manager’s stewardship arrangements and receives regular feedback from the Manager in respect of meetings with the management. |
| Areas of Engagement | Issue | Engagement | Impact |
| Investment mandate and objective | The Board has responsibility to shareholders to ensure that the Company’s portfolio of assets is invested in line with the stated investment objective and in a way that ensures an appropriate balance between spread of risk and portfolio returns. | The Board worked closely with the Investment Manager throughout the year in further developing investment strategy and underlying policies in the interests of shareholders and future investors. The Manager’s approach to the consideration of ESG factors in respect of the Company’s portfolio, as well as its engagement with investee companies, is to encourage the adoption of sustainable business practices which support long-term value creation. | The Company’s investment objective is to provide an attractive level of income together with capital appreciation over the long term in a manner consistent with the principles of sustainable investing adopted by the Company. The Board believes that it offers an attractive investment strategy with the additional alpha potential the ESG integration provides. |
| Shareholders | Continued shareholder support and engagement are critical to the continued existence of the Company and the successful delivery of its long-term strategy. | The Board is committed to maintaining open channels of communication and to engage with shareholders. The Company welcomes and encourages attendance and participation from shareholders at its Annual General Meetings. Shareholders will have the opportunity to meet the Directors and Investment Manager and to address questions to them directly. The Investment Manager will also provide a presentation on the Company’s performance and outlook. The Annual Report and Half Yearly Financial Report are available on the BlackRock website and are also circulated to shareholders. In addition, regular updates on performance, monthly factsheets, the daily NAV and other information are also published on the Manager’s website at www.blackrock.com/uk/brsa. The Board also works closely with the Manager to develop the Company’s marketing strategy. Unlike trading companies, one-to-one shareholder meetings normally take the form of a meeting with the Investment Manager as opposed to members of the Board. The Company’s willingness to enter into discussions with institutional shareholders is also demonstrated by the programmes of institutional presentations by the Portfolio Managers. If shareholders wish to raise issues or concerns with the Board, they are welcome to do so at any time. The Chair is available to meet directly with shareholders periodically to understand their views on governance and the Company’s performance where they wish to do so. She may be contacted via the Company Secretary. | The Board values any feedback and questions from shareholders ahead of and during Annual General Meetings in order to gain an understanding of their views and will take action when and as appropriate. Feedback and questions will also help the Company evolve its reporting, aiming to make reports more transparent and understandable. Feedback from all substantive meetings between the Investment Manager and shareholders will be shared with the Board. The Directors will also receive updates from the Company’s Broker on any feedback from shareholders, as well as share trading activity, share price performance and an update from the Investment Manager. Portfolio holdings are ultimately shareholders’ assets and the Board recognises the importance of good stewardship and communication with investee companies in meeting the Company’s investment objective and strategy. The Board monitors the Manager’s stewardship arrangements and receives regular feedback from the Investment Manager in respect of meetings with the management of portfolio companies. |
| Responsible investing | More than ever, the importance of good governance and consideration of sustainable investment are key factors in making investment decisions. Climate change is becoming a defining factor in companies’ long-term prospects across the investment spectrum, with significant and lasting implications for economic growth and prosperity. | The Board believes that responsible investment and sustainability are important to the longer-term delivery of the Company’s success. The Board works closely with the Investment Manager to regularly review the Company’s performance, investment strategy and underlying policies to ensure that the Company’s investment objective continues to be met in an effective and responsible way in the interests of shareholders and future investors. The Investment Manager’s approach to the consideration of ESG factors in respect of the Company’s portfolio, as well as the Investment Manager’s engagement with investee companies to encourage the adoption of sustainable business practices which support long-term value creation, are kept under review by the Board. The Board also expects to be informed by the Manager of any sensitive voting issues involving the Company’s investments. The Investment Manager reports to the Board in respect of its ESG policies and how these are integrated into the investment process; a summary of BlackRock’s approach to ESG and sustainability is set out in the Company’s Annual Report for the year ended 31 October 2022. The Investment Manager’s engagement and voting policy is detailed in the Company’s Annual Report for the year ended 31 October 2022 and on the BlackRock website. | The Board and Investment Manager believe there is likely to be a positive correlation between strong ESG practices and investment performance over time. |
| Management of share rating | The Board recognises that it is in the long-term interests of shareholders that shares do not trade at a significant discount (or premium) to their prevailing NAV. The Board believes this may be achieved by the use of share buy back powers and the issue of shares. | The Board monitors the Company’s share rating on an ongoing basis and receives regular updates from the Manager and the Company’s Broker regarding the level of discount/premium. The Board believes that the best way of maintaining the share rating at an optimal level over the long term is to create demand for the shares in the secondary market. To this end, the Investment Manager is devoting considerable effort to broadening the awareness of the Company, particularly to wealth managers and to the wider retail market. In addition, the Board has worked closely with the Manager to develop the Company’s marketing strategy, with the aim of ensuring effective communication with existing shareholders and to attract new shareholders to the Company in order to improve liquidity in the Company’s shares and to sustain the share rating of the Company. | The Board continues to monitor the Company’s premium/discount to NAV and will look to buy back or issue shares if it is deemed to be in the interests of shareholders as a whole. During the financial year the Company did not buy back or reissue any shares. The Company’s average discount for the year to 31 October 2022 was 5.3% and the discount at 23 January 2023 stood at 5.8%. |
| Service levels of third-party providers | The Board acknowledges the importance of ensuring that the Company’s principal suppliers are providing a suitable level of service, including the Manager in respect of investment performance and delivering on the Company’s investment mandate; the Custodian and Depositary in respect of their duties towards safeguarding the Company’s assets; the Registrar in its maintenance of the Company’s share register and dealing with investor queries; and the Company’s Broker in respect of the provision of advice and acting as a market maker for the Company’s shares. | The Manager reports to the Board on the Company’s performance on a regular basis. The Board carries out a robust annual evaluation of the Manager’s performance, their commitment and available resources. The Board performs an annual review of the service levels of all third-party service providers and concludes on their suitability to continue in their role. The Board receives regular updates from the AIFM, Depositary, Registrar and Broker on an ongoing basis. The ongoing COVID-19 pandemic continued to pose challenges to the operation of businesses across the globe. The Board has continued to work closely with the Manager to gain comfort that relevant business continuity plans are operating effectively for all of the Company’s key service providers. | All performance evaluations were performed on a timely basis and the Board concluded that all key third-party service providers, including the Manager, were operating effectively and providing a good level of service. The Board has received updates in respect of business continuity planning from the Company’s Manager, Custodian, Depositary, Fund Accountant, Registrar and Printer and is confident that arrangements are in place to ensure a good level of service will continue to be provided. |
| Board composition | The Board is committed to ensuring that its own composition brings an appropriate balance of knowledge, experience and skills and that it is compliant with best corporate governance practice under the UK Code, including guidance on tenure and the composition of the Board’s committees. | During the year, the Board appointed a new Director. The Nomination Committee agreed the selection criteria and the method of selection, recruitment and appointment. The services of an external search consultant, Cornforth Consulting Ltd, were used to identify potential candidates. All Directors are subject to a formal evaluation process on an annual basis. All Directors stand for re-election by shareholders annually. Shareholders may attend the Annual General Meeting and raise any queries in respect of Board composition or individual Directors in person or may contact the Company Secretary or the Chair using the details provided in the Company’s Annual Report for the year ended 31 October 2022. The Board is currently undertaking another review of succession planning arrangements having identified the need for a new Director following the retirement of the Chairman, Mr Miller, and the forthcoming retirement of Mr Casey. The services of Cornforth Consulting Ltd, are being used again to identify potential candidates. | As a result of the recruitment process, Mr Barron was appointed as a Director of the Company with effect from 22 March 2022. As at the date of this report, the Board was comprised of two men and two women. Two Directors have a tenure in excess of nine years. Details of each Director’s contribution to the success and promotion of the Company are set out in the Directors’ Report in the Company’s Annual Report for the year ended 31 October 2022 and details of Directors’ biographies can be found in the Company’s Annual Report for the year ended 31 October 2022. The Directors are not aware of any issues that have been raised directly by shareholders in respect of Board composition in the year under review. Details of the proxy voting results in favour and against individual Directors’ re-election at the 2022 Annual General Meeting are given on the Manager’s website at www.blackrock.com/uk/brsa. |
Viability statement
In accordance with provision 31 of the 2018 UK Corporate Governance Code, the Directors have assessed the prospects of the Company over a longer period than the twelve months referred to by the ‘Going Concern’ guidelines. The Company is an investment trust with the objective of providing an attractive level of income return together with capital appreciation over the long term.
The Directors expect the Company to continue for the foreseeable future and have therefore conducted this review for a period up to the Annual General Meeting in 2026. The Directors assess viability over a rolling three-year period as they believe it best balances the Company’s long-term objective, its financial flexibility and scope with the difficulty in forecasting economic conditions which could affect both the Company and its shareholders. The Company also undertakes a continuation vote every three years with the next one taking place at the Annual General Meeting in 2025.
In making an assessment on the viability of the Company, the Board has considered the following:
· the impact of a significant fall in U.S. equity markets on the value of the Company’s investment portfolio;
· the ongoing relevance of the Company’s investment objective, business model and investment policy in the prevailing market;
· the principal and emerging risks and uncertainties, as set out above, and their potential impact;
· the level of ongoing demand for the Company’s shares;
· the Company’s share price discount/premium to NAV;
· the liquidity of the Company’s portfolio; and
· the level of income generated by the Company and future income and expenditure forecasts.
The Directors have concluded that there is a reasonable expectation that the Company will continue in operation and meet its liabilities as they fall due over the period of their assessment based on the following considerations:
· the Investment Manager’s compliance with the investment objective and policy, its investment strategy and asset allocation;
· the portfolio mainly comprises readily realisable assets which continue to offer a broad range of investment opportunities for shareholders as part of a balanced investment portfolio;
· the operational resilience of the Company and its key service providers and their ability to continue to provide a good level of service for the foreseeable future;
· the effectiveness of business continuity plans in place for the Company and its key service providers;
· the ongoing processes for monitoring operating costs and income which are considered to be reasonable in comparison to the Company’s total assets;
· the Board’s discount management policy; and
· the Company is a closed-end investment company and therefore does not suffer from the liquidity issues arising from unexpected redemptions.
In addition, the Board’s assessment of BlackRock Sustainable American Income Trust ability to operate in the foreseeable future is included in the Going Concern Statement which can be found in the Directors’ Report in the Company’s Annual Report for the year ended 31 October 2022.
By order of the Board
CAROLINE DRISCOLL
For and on behalf of
BlackRock Investment Management (UK) Limited
Company Secretary
26 January 2023
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