Could value and sustainability come to the fore..? BlackRock Sustainable American Income

BlackRock Sustainable American Income (BRSA) is positioned at what we would describe as the pragmatic end of the ESG fund spectrum, taking an engagement, rather than exclusionary, approach to some key sectors such as Energy, although as we discuss in the ESG section, some other sectors are excluded.

The team’s focus on value sets the trust apart from many of its peer group and the wider US funds’ universe. In a period during which growth investing has been a difficult place to be in, BRSA has provided better than average downside protection and some diversification at a time when many asset classes have been quite correlated.

This has been helped by that pragmatic approach to ESG, with BRSA gaining from its exposure to the leaders in the energy sector, one of the few bright spots in equity markets over the last 12 months.

The last ten years or more has seen growth stocks perform extremely well, some no doubt because they are genuine growth companies. but an era of extremely cheap money has also been a strong tailwind.

Without that tailwind, and with markets faced with prolonged higher interest rates and inflation, we think different strategies with more focus on valuation and realistic appraisals of growth could come to the fore for the long term. BRSA’s team have long followed a value-orientated strategy and are very experienced hands.

Since 2018, BRSA has implemented a dividend policy which utilises a mixture of current revenue and reserves to pay dividends. Over this time, BRSA has consistently paid a quarterly dividend of 2p per share, which equates to an historic yield of 4.2%. In the current financial year, BRSA has, so far, paid three of the four quarterly dividends at the same rate.

2022 was a tough year for ESG strategies, although positive industry fund flows suggest that investors have kept faith. Against that backdrop, BRSA had a pretty good year in performance terms, operating at the pragmatic end of the ESG spectrum, excluding the lowest scoring companies, but not excluding sectors such as energy.

Some ESG investors may prefer ‘exclusion’ over ‘engagement’, but in our view, engagement is a credible strategy with the potential to make a real impact. The team are keen to point out that engagement doesn’t mean taking a board seat or dictating terms, but rather to understand what companies are doing on the sustainability front and assessing whether or not they’re making progress towards their goals and sharing best practices.

It’s quite possible that stock market rallies will see growth stocks rebound as investors seek to buy on the dips, but it seems to us that higher interest rates and inflation are not just a passing phase.

The investment strategies that have worked for the last decade may not produce the same results on a longer-term view. BRSA’s focus on value and sustainability may be more aligned with what is to come, and one must admire the resilience of the team for sticking with their value approach during a long period, where growth investing was so successful.

For investors, the US remains a crucial market. As uncertainty rises, capital flows into the safe haven of the US dollar.

As we discuss in the Portfolio section, BRSA provides a different set of exposures and a different investment philosophy, which provides some welcome diversification at a time when some investors may be starting to realise quite how crowded the trades they have put on in the last ten years have become.