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- North American Income posts modest underperformance in uncertain year
North American Income Trust (NAIT) has published its annual results for the year ended 31 January 2024, a period in which US investors were focused on monetary policy developments, geopolitical tensions and the uncertainty surrounding the possibility of either a recession or a soft landing for the US economy. During the period, NAIT provided NAV and share price total returns of -1.6% and -0.9%, which NAIT says compares against a return of 2.6% from its primary reference index, the Russell 1000 Value Index (all figures in sterling terms).
Stock selection, mainly in the materials sector, weighed on relative performance. Sector allocation, especially in the industrials sector, was also negative. Sterling strength was also a headwind.
NAIT’s discount narrowed marginally from 9.3% to 9.1% during the year. More broadly, the investment trust sector experienced a widening of discounts over much of 2023 and NAIT used its share buyback authority to try and limit discount volatility during the period. The revenue account remained healthy, maintaining a level of cover established in prior years.
Even with the volatility witnessed in financial markets, US equities recorded gains over the year, with growth stocks significantly outperforming value stocks. Over the year to 31 January 2024, growth-focused stocks performed relatively well. In particular, there was a strong performance from the technology sector, especially artificial intelligence-related companies, such as NVIDIA, Microsoft and Alphabet. During the year to 31 January 2024, the top seven (or Magnificent Seven) technology stocks contributed nearly 65% of the total return of the S&P 500 Index, driven by the market’s enthusiasm for AI. NAIT says that the communication services, technology and industrials sectors were the strongest performers within the Russell 1000 Value index, while the utilities, materials and energy sectors were the primary market laggards for the period.
The US Federal Reserve (the Fed) continued with its monetary tightening measures in the first half of the financial year, with the central bank increasing the target range for the federal funds rate to 5.25%-5.50%, a level unseen in over two decades. In the second half of the financial year, the Fed maintained interest rates and its messaging turned more dovish as inflationary pressures reduced, raising the prospect of monetary easing. However, annual core inflation remained above the Fed’s 2% target, while conflicts in the Middle East and Ukraine increased the risk of an uptick in inflation and, at the end of 2023, the Fed signalled that it would proceed cautiously.
On a positive note, the US economy remained strong and avoided the widely anticipated recession after the Fed’s prolonged period of monetary tightening, as well as the banking sector failures that occurred earlier in 2023. The US government reached an agreement in June 2023 to suspend its debt ceiling, thereby avoiding a government shutdown, which helped markets. As the financial year progressed, investors embraced the likelihood of a soft landing for the economy, as opposed to a recession. Nevertheless, macroeconomic uncertainty continues, especially with the ongoing conflicts in the Middle East and Ukraine and the upcoming US election.
At a sector level, the main detractor from performance was the materials sector due to negative stock selection. The second-largest detractor was the industrials sector due to stock selection and, to a lesser extent, an underweight exposure.
The largest individual stock detractors from performance included:
At a stock level, the largest individual contributors included:
The top five contributors and bottom five contributors over the year ended 31 January 2024 are detailed below:
The manager initiated positions in five companies during the year:
Five companies were sold out in their entirety during the year:
NAIT’s manager says that its holdings continued to build upon an established track record of dividend growth during the review period, with several companies announcing double-digit increases. It highlights semiconductor suppliers Broadcom and Analog Devices, which boosted their payouts by 14% and 13%, respectively, as well as the insurance provider AIG Group, which increased its dividend by 13%. Derivatives exchange operator CME Group, renewable energy company NextEra Energy, and healthcare provider CVS each raised their quarterly dividend payouts by 10%.
Additionally, two holdings in the portfolio announced special dividend payments to shareholders during the review period. Derivatives exchange operator CME Group declared an annual variable dividend of US$5.25 per share in December 2023. The company uses this approach to facilitate paying out all cash that it generates over the year beyond a minimum threshold. Gaming-focused REIT Gaming and Leisure Properties Inc. declared a special earnings and profits cash dividend of $0.25 per share.
The Company’s equity portfolio generated £17.1 million in revenue during the financial year, close to the £17.8 million in the previous year. Options continue to be part of the portfolio and represented 17.2% of the Company’s total gross income, whilst corporate bonds accounted for only 2.6%. The Company’s revenue return per ordinary share dipped marginally to 12.0 pence compared to last year’s 12.2 pence.
The board remains committed to the Company’s progressive dividend policy and extending the track record of thirteen consecutive years of dividend growth. The board declared, on 28 March 2024, a fourth interim dividend of 3.9 pence per share, resulting in total dividends for the year ended 31 January 2024 of 11.7 pence per share (2023 – 11.0p) and representing annual growth of 6.4%. The fourth interim dividend will be paid on 3 May 2024 to shareholders on the register on 12 April 2024 (ex-dividend date: 11 April 2024).
The Company’s share price ended the year at 289.0 pence, a 9.1% discount to the total NAV of 317.8 pence. This compares to a 9.3% discount at the end of the 2023 financial year. Over the course of the year, the Company’s shares mainly traded at discounts ranging between 9.0% and 15.0%. During the year, 2,882,402 shares were bought back and cancelled at an average price of 275 pence and an average discount of 11.5%. The total cost was £8.0 million. Since 31 January 2024, the Company says that it has bought back an additional 1,187,253 ordinary shares at a cost of £3.3m.
NAIT’s board believes that the sensible use of gearing should enhance returns over the longer term and NAIT has long-term financing agreements totalling US$50 million with MetLife which comprise two loans of US$25 million with terms of 10 and 15 years. These are fixed at 2.7% and 3.0% per annum expiring in December 2030 and 2035 respectively. Net gearing at 31 January 2024 stood at 4.1% (2023: 2.9%).