BlackRock American Income (BRAI) has published a circular this morning in which it has announced proposals for a change in investment policy and a tender offer. These proposals are being made in advance of a continuation vote that is due at its AGM this year (separately, BRAI has published its full-year results this morning). Shareholder approval is needed for the proposals to be implemented and a general meeting is being convened on 16 April for this purpose.

Background to the proposals

BRAI’s board says that it recognises that the trust’s performance relative to the Russell 1000 Value Index has been challenged for some time. The board has therefore sought to offer shareholders active investment management at a lower cost and to identify a differentiated investment strategy that shareholders will find appealing and which better enables BRAI to achieve greater scale. Over the last nine months, BRAI’s board has been engaging with advisers to consider a number of strategic options to address these points. As part of this review, the board also considered shareholder feedback on the company’s current strategy.

Following the review, BRAI’s board is proposing to amend the company’s investment approach (including its investment objective and investment policy) based on a proposal that was presented by BlackRock which is focused on a systematic active equity strategy. Shareholders should note that if the continuation vote is not passed at the 2025 AGM, these proposals will not be put to shareholders and the general meeting will be adjourned.

Highlights of the proposals

A summary of the proposed key changes are as follows:

• adopt a systematic active equity investment process. By combining the power of big data, artificial intelligence and human expertise, the systematic investment process offered by BlackRock aims to unlock new ways to seek consistent portfolio outcomes and exploit market inefficiencies; and
• maintain focus on a value investment style but narrow the primary geographic focus of the company from North America to the US.

BRAI says that its strategy will continue to benchmark performance against the Russell 1000 Value Index, providing a diversifier from US growth allocations, adding that there are few US equity-focused investment trusts and fewer focused with a value bias.

BRAI says that, if shareholders approve the changes to its investment objective and investment policy, it believes it will be the first investment trust through which to access a systematic active equity strategy in the UK. Similar to the existing investment policy the portfolio managers will retain the flexibility to invest up to 20 per cent. of gross asset value in securities that are not US equity securities, but in practice BRAI is expected to be fully invested in US equity securities.

At the same time, BRAI’s board will take the opportunity to remove the ability to invest in options for investment purposes and write covered call options, which have not been used for a number of years. In addition, following the review of the implications of the United Kingdom’s Sustainability Disclosure Requirements last year and the removal of “Sustainable” from the company’s name, the new approach will remove the ESG baseline screens and ESG outperformance targets. Whilst ESG information and data will still form some of the important inputs of the research and investment process, by removing the ESG commitments the portfolio managers will have access to the entire investment universe.

Shareholders still want a value focus

BRAI says that feedback from shareholders has demonstrated that investors appreciate the company’s exposure to the value investment style, in contrast to many other US focused investment trusts, as well as the attractive level of income. The revised strategy will be run by the investment manager’s systematic active equity team which has nearly four decades of research and investment experience.

Enhanced dividend policy and gearing

Assuming changes in investment objective and investment policy are approved, BRAI will adopt an enhanced dividend policy under which it will pay a dividend of 1.5% of its NAV every quarter, being equivalent to 6% of NAV annually. BRAI’s board says that it will work with the manager to introduce gearing to the strategy, so as to make use of the tools available within the investment trust structure.

Improved management fee terms

Also subject to the approval of the new investment objective and policy, BRAI will also benefit from improved management fee terms, currently charged at 0.70 per cent. of the Net Asset Value per annum, with management fees to be charged on the following basis:

• 0.35 per cent. of the Net Asset Value up to and including £350m; and
• 0.30 per cent. of the Net Asset Value in excess of £350m.

Tender offer and introduction of new regular discount control mechanism

Also subject to shareholder approval of the proposals, BRAI’s board will provide shareholders with a tender offer for up to 20% of BRAI’s issued share capital at a 2% discount to NAV.

In addition, in respect of each three-year period from 1 May 2025, shareholders will be offered a 100% tender at a 2% discount where the annualised total NAV return of the company does not exceed the annualised benchmark return (being the Russell 1000 Value Index in net sterling total returns) by more than 50 basis points over the relevant calculation period. The board may also, at its discretion, determine to implement a tender offer on the basis set out above where the cum-income Net Asset Value of the company as at close of business on the last business day of a calculation period is less than £125m.

Fee holiday and costs contribution

Subject to shareholders approving the changes to the investment objective and policy, BlackRock has agreed to make a contribution to the costs of the proposals that do not relate to the tender offer, so that they are cost-neutral to shareholders in respect of their continuing investment in BRAI. BlackRock is also applying a six-month management fee holiday in respect of the period 1 May 2025 to 31 October 2025.

[QD comment: We think these changes show the value of continuation votes. As BRAI’s date with destiny has approached, its board has taken a good look at the struggling trust’s strategy and has come up with a raft of shareholder friendly proposals to reposition it and move it forward, backstopped by tender offers if things don’t work out as is currently hoped. However, we would still caution strongly against the 100% tender offers as these leave trusts as hostages to fortune – if one of these falls due when the strategy is out of vogue or the market is depressed, this could lead to a dash for the exits and therefore liquidation of the portfolio at precisely the wrong moment and when longer-term investors should be taking advantage of the closed-end structure to look through the noise.]