Investors in British Assets Trust, accustomed to investing in high-yielding UK shares, could soon find the portfolio populated with shares in Indian, European and Japanese companies, with direct lending and infrastructure added later.
The underperforming global equity income trust, which is dominated by UK shares at present, will be renamed BlackRock Income Strategies Trust when management moves from F&C Investments to BlackRock on 27 February.
Should 50% of shareholders who vote at an extraordinary general meeting the day before approve proposals put forward by the board, British Assets will adopt a multi-asset strategy.
British Assets Trust
- Sector: Global Equity Income
- Discount to NAV: 10%
- Market cap: £381 million
- Net yield: 4.9%
Moving into new regions
BlackRock head of diversified strategies Adam Ryan (pictured above), who would assume the role of lead manager if the new mandate is adopted, said: ‘Shareholders shouldn’t be surprised if, on day one, we have a 1%-2% position in Indian equities. It’s a huge beneficiary of the US$50 drop in the price of crude oil over the past six months, which equates to adding 1% to its gross domestic product.’
Ryan is also ‘reasonably positive’ on Europe and ‘still quite likes’ Japan. ‘From a growth perspective, Europe has the potential to surprise on the upside,’ said the Citywire + rated manager. ‘People are very negative about it, but some leading economic indicators have turned up in the last month or two.’
Ryan warned that Japanese prime minister Shinzo Abe’s third arrow of structural reform may take longer to prove itself than initially hoped, but said he believed it boded well for Japanese equities in the medium to long term.
THE TRUST HAS A HIGH ALLOCATION TO THE UK DESPITE ITS GLOBAL MANDATE
Bearish on some areas
Conversely, Ryan is bearish on emerging markets and high yield bonds.
‘The story in China doesn’t look great,’ he said. ‘We’re looking at sub-5% economic growth for the long term as it adjusts towards a more domestically driven economy, and with that will come challenges: there’s quite a lot of weakness in the property sector.
‘Outside of India, it’s difficult to come up with any positive stories. Just look at Russia or Brazil.’
Despite it being a mainstay for income-seeking investors, the new fund will initially have no allocation to high-yield bonds, an area to which Ryan’s BlackRock diversified strategies team had 15% allocation 18 months ago, but which he now deems a lobster-pot investment.
‘You can get your money in, but you can’t get your money out. There’s not a huge risk of default, but a lack of liquidity makes it pretty unattractive,’ he said.
TOP 10 HOLDINGS
‘Ripping up’ the benchmark
The trust will do away with its existing benchmark (80% FTSE All-Share Index/20% FTSE World (ex-UK) Index), instead adopting an objective to achieve a total portfolio return of the Consumer Prices Index (CPI) plus 4% gross per annum over a market cycle (five to seven years). The focus on income generation will remain, and the current 6.44p dividend (4.9% yield) will be maintained with the aim of growing it at least in line with inflation.
‘It’s quite a significant change: ripping up the benchmark to focus much more in terms of an outcome,’ said Ryan.
His team at BlackRock has £15 billion of assets under management, two-thirds of which is managed against an outcome, as opposed to an index benchmark.
THE TRUST HAS PERFORMED POORLY RECENTLY
Equity income expert
The new fund will have 40% in UK equities, with this part of the portfolio managed by Mark Wharrier, head of UK equity income at BlackRock.
‘There may be quite a lot of commonality [between the existing portfolio and the stocks Wharrier wants to hold], so it will be more a case of evolution,’ said Ryan. ‘However, we’ll be selling down equities and, as the UK equity market is pretty liquid, we’ll look to do that with an eye on managing costs within a couple of weeks.’
Ryan will also introduce fixed interest securities in the same period, while the longer term game plan is to have up to 15% in alternative assets, built up within the next six to 18 months.
Assets that Ryan and his team will consider introducing, subject to board approval, include direct lending, which he said was entirely appropriate for the investment trust.
‘That’s what it was created to do more than 100 years ago,’ he said.
He also plans to introduce commercial real estate and infrastructure, particularly in the field of renewables. ‘These are areas we’ve been building up experts in over the last couple of years,’ said Ryan, who will manage asset allocation on a strategic basis, using futures and options to make short-term adjustments.
He advocated the benefits of taking a highly unconstrained approach: in 2008, before the peak of the financial crisis, he and his team had very limited exposure to corporate bonds on the grounds that they were expensive relative to the risk of default. By the summer of 2009, when valuations had come off significantly, one-third of assets were allocated to this area.
‘Of course, there will be many more moving parts [compared with the existing fund], but in many ways this is a much more logical way to invest,’ he said.
He said he was ‘very’ confident of driving a real turnaround in performance at the trust, which has produced returns of just 59.3% and 54.3% in net asset value and share price terms over five years, compared with a 76.1% rise in the FTSE World?
‘We’ve grown our net new business by 10%-15% per annum and we wouldn’t have done that without highly competitive investment performance,’ he said.
John Cornelius, Financial planner, Warwick Butchart
British Assets Trust was formed in 1898, since when it has been managed by F&C Investments and its predecessors. For the past several years performance has been disappointing, but its high dividend yield has made it popular with income-seeking investors.
The 2014 dividend increase was the 44th consecutive annual increase. Although the trust sits in the Global Equity Income sector, well over 60% is held in UK equities.
Once management has switched to BlackRock with Adam Ryan as lead manager, the portfolio is expected to have about 40% in UK equities with the balance in global equities, hedge funds, alternatives, bonds and commodities.
This is a radical change that might not please all existing shareholders, who may be investors attracted by the current high UK equity content.
The board might well be keen to continue its long record of annual dividend increases. It will be interesting to see if a multi-asset investment will be able to achieve this and improve total returns.
Ewan Lovett-Turner, Associate director of investment companies research, Numis Securities
If British Assets Trust’s shareholders vote through the board’s proposals for the fund, under BlackRock management the mandate will change from a global equity income to a multi-asset approach, the fund will be renamed and a tender offer for up to 20% of share capital at net asset value less a 2% discount and costs will be implemented. Following the tender, a zero discount policy will be operated. The management fee will remain 0.4% of gross assets.
The board has been encouraged by the initial feedback and support it has received from shareholders on the proposed changes. AXA Investment Management has discretionary management control over 15.3% share capital and has given a non-legally binding letter of intent to vote in favour.
We expect shareholders to approve the proposals, given the trust’s poor long-term performance record and because it has consistently traded on a wider discount than its peers, despite several attempts to reinvent itself in the past.
In addition, we believe there is a role for a low-cost, income-oriented multi-asset closed-end fund, with a progressive dividend policy and a focus on capital preservation.
We expect the mandate to prove popular with retail investors for savings and pensions, as well as selected private wealth managers, supported by BlackRock’s marketing efforts.