“The US has never been one of the higher yielding stock markets. US companies weren’t worried about paying dividends,” he said.
“But that has changed over the years. There’s been a cultural shift [toward dividends] in the US.”
Elliott, head of investment trust research at Winterflood, says the ideal trust to take advantage of North America’s newfound emphasis on dividends is the North American Income trust, run by Aberdeen’s head of North American equities Paul Atkinson.
The North American Income trust is currently trading on a discount of 6.7 per cent, wider than its 2.8 per cent average over the last 12 months. Earlier this year the trust was trading on a premium of 3.6 per cent.
“It’s an attractive value opportunity as far as we’re concerned,” Elliott said.
The trust aims to provide investors with above average dividend income and some long-term capital growth by investing in dividend paying companies in the S&P 500. The fund also has some exposure to fixed interest and a small options overlay strategy to boost the income and limit downside risk.
Elliott goes on to say that the Aberdeen trust is in a better position than other trusts in the sector, such as the BlackRock North American Income Trust, to take advantage of the changing dynamic of dividend payments and outperform in rising markets.
He says a key advantage of the strategy is that it doesn’t rely too heavily on options and derivatives for income, instead employing an equity income strategy to deliver the majority of its yield.
The trust is yielding 3.3 per cent, compared to a 1.89 per cent yield from the overall S&P 500.
The BlackRock trust, by contrast, is more reliant on the option writing strategy to deliver income, which Elliott says has been a drag on the performance of the trust in rising markets with low volatility.
“In rising markets it’s a significant headwind to face,” he said. “In strong market conditions this has detracted from performance as, while they offer some downside protection, they also limit upside.”
Over the last 12 months, for example, the BlackRock North American Income trust is down 0.46 per cent while the Aberdeen North American Income Trust is up 2.26 per cent. However, both trusts have underperformed the more growth-oriented IT North American Equities sector, which made 7.99 per cent.
Performance of trusts and sector over 1 year
Source: FE Analytics
The BlackRock trust has recently undergone a manager change, with Tony DeSpirito taking the helm in August.
Elliott says the core philosophy of the BlackRock trust will remain the same and DeSpirito’s leadership could help to stem recent underperformance, but he still thinks there are more attractive funds for exposure to the US.
Cantor Fitzgerald’s Charles Tan agrees the Aberdeen North American Income trust is an interesting opportunity.
“One of the investment trusts in the US sector that we think might perform well going forward is Aberdeen’s North American Income trust,” he said.
“Since the change of mandate to an income-focused trust two years ago, it has underperformed (as you might expect in a risk-on environment, like the one we’ve seen in recent years), but as investors reassess the valuations of racy sectors such as technology, we think the higher-yielding income theme could re-gain traction.”
As Tan points out, from a total return perspective, the trust has underperformed the S&P 500 over the last two years since its mandate changed.
However, it has outperformed peers in the IT North American Equities sector.
Performance of trust, sector and index over 2 years
Source: FE Analytics
Fran Radano, senior investment manager on the trust, says the portfolio is made up of a mix of the highest quality high yielding stocks in the S&P 500 and the lowest quality investment grade names. He adds that the fixed income sleeve of the trust has diminished as the outlook for equities continues to improve.
“We’ve whittled down corporate bond exposure and moved money out of fixed income into equities,” he said.
The trust takes a quality and value approach, with a concentrated portfolio of around 40 stocks. The fixed income portion of the trust typically makes up 5 to 15 per cent, but it now stands at 7.5 per cent, according to Radano.
He says there are five key things the team look for when selecting stocks – the business model and its sustainability, management, financials, corporate governance and the firm’s proxy statement, or how management are paid.
The trust has ongoing charges of 1.04 per cent.
Lead manager on the trust, Paul Atkinson, says the trend for US companies toward paying dividends is clear and has a long way to run.
“The desire for American companies to increase dividend payouts is in the early innings,” he said. “Corporate America is in a very good position. Corporate profitability is high and can continue to grow.”
The US market has performed strongly over the last several years, but Atkinson says that doesn’t make the entire market overvalued.
“The last 10 years of earnings in the US have been punctuated by a series of earnings shakes – the TMT bubble, capex burst, real economic slowdown,” he said.
“If you can draw a line through normalised earnings in that period well then you’re a better statistician than me.”
Atkinson says he’s comfortable paying 16x forward earnings with an expectation of mid-high single digit growth.
“That’s very much within the historical range,” he said.
