The North American Income Trust plc 23
Strategic Report Governance Overview General Portfolio Corporate Information Financial Statements
Market review
US share prices, as measured by the Company’s primary
reference index, the Russell 1000 Value Index, rose in
local-currency terms over the year to 31 January 2024
albeit by less in sterling terms as the pound strengthened
against the US dollar by 3.4%.
Faced with a relatively resilient and robust economy,
including a strong labour market, the US Federal Reserve
(Fed) continued to tighten monetary policy through 2023.
The Fed raised interest-rates by 25 basis points (bps) at
each of its meetings between February and May, with the
last increase in July 2023 taking the target range for the
Fed funds rate to 5.25-5.50%, the highest level since 2001.
At its January 2024 meeting, after eleven rate increases
since March 2022, the Fed finally removed the tightening
bias from its statement. That said, it aims to keep policy
restrictive and proceed carefully for now, continuing with
its data-dependent approach as it awaits more
transparency over underlying macroeconomic trends.
However, given the sustained fall in the Fed’s targeted
inflation measure, three rate cuts – as forecast by
committee members in December’s ‘dot plot’ – are still
possible in 2024. There could also be further easing to
come in 2025 and 2026.
US stock markets rose steadily over most of the period,
even shaking off turmoil in the banking sector in March
2023, when two regional banks, Silicon Valley Bank and
Signature Bank, collapsed. In particular, investor sentiment
was helped by the long-awaited news in May of an
agreement to raise the US debt ceiling. Investor concern
that interest rates would stay higher for longer led to
stocks weakening in August through to October. However,
equities then rebounded notably towards the end of the
year as these fears eased due to more encouraging
inflation trends.
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. These stocks are more sensitive to the
prospect of monetary tightening coming to an end,
which will lower the discount rate applied to these long
duration assets.
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.
Performance
The Company returned -1.6% per share on a net asset
value basis in sterling terms for the year ended 31 January
2024, underperforming the 2.6% return of the Russell 1000
Value Index. The revenue account remained healthy,
maintaining a level of cover established in prior years.
At a sector level, the main detractor from the Company’s
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:
· agricultural sciences company, FMC Corporation, a
producer of crop-protection chemicals, suffered from
inventory destocking which forced management to
materially reduce its guidance. The weakness was
derived from farmers over-ordering crop inputs after
being unable to procure supplies in 2022 due to supply-
chain disruptions.
· Pharmaceutical firm, Bristol-Myers Squibb (“Bristol-
Myers”), underperformed due to a combination of new
US government pricing measures affecting the
pharmaceutical industry and a pipeline that has not yet
received full approval for launching new drugs.
· Drugstore chain CVS Health was another weak
performer as it contended with rising patient utilisation in
its managed care segment and investors debated the
cost of its acquisition of Oak Street Health, a provider of
value-based care to the Medicare population.
On the positive side, the two largest contributors to the
Company’s performance at the sector level were energy
and technology due to stock selection.
At a stock level, the largest individual contributors included:
· Semiconductor supplier Broadcom performed strongly,
alongside other companies with artificial intelligence
(AI) exposure, after reports indicated a significant
increase in demand for AI solutions. Broadcom
subsequently reported earnings that confirmed these
improving demand trends.
· Phillips 66, the oil refiner, discussed options to improve
operational performance, along with various strategic
alternatives, with activist investor Elliot Management
(“Elliot”). Elliot established a $1 billion position in Phillips
66, will nominate two new board members, and publicly
outlined a strategy to unlock shareholder value.
Investment Mana
er’s Review