Market Review

North American equity market indices fell significantly over the year ended 31 January 2023. A combination of higher interest rates and surging inflation caused North American share prices to fall sharply from early 2022 onwards. Overall, however, North American equities ended higher in sterling terms on a total return basis as the US dollar strengthened against the pound. Please refer to your Manager’s Review on pages 22 to 24 of the 2023 Annual Report for an in-depth review of the market.

Performance

Over the year ended 31 January 2023, the Company’s net asset value (“NAV”) total return per share was 9.6% outperforming the 8.5% total return in sterling terms for the Russell 1000 Value Index, the Company’s primary reference index, while the share price total return was 12.4%. The discount at which the share price traded relative to the NAV narrowed over the year from 11.2% to 9.3%. While it is pleasing to report outperformance, it is important to note that most of the absolute increase in the value of the portfolio can be ascribed to the strengthening of the US dollar by 12.2% year over year, which boosted the valuations on the balance sheet in sterling terms. By way of illustration, the Russell 1000 Value Index delivered a total return in US dollar terms of -0.4%.

The outperformance was attributable mainly to stock selection in the materials and real estate sectors although allocation was a small negative in the latter. The Company’s performance relative to the reference index was hampered by stock selection in the consumer discretionary and energy sectors although allocation within those segments partially offset the negative impact.

A more detailed review of portfolio activity and performance can be found in the Manager’s Review on pages 22 to 24 of the 2023 Annual Report.

Revenue Account

Total revenue from portfolio’s equity holdings over the period under review was £17.8 million (2022 - £15.0 million). This was against a background which saw most of the Company’s equity holdings continue their established record of dividend growth and the US dollar strengthen from a weighted average of $1.37 to the pound in 2022 to a weighted average of $1.22 to the pound in the current year. During the year ended 31 January 2023, the Company received premiums totalling £4.2 million (2022 - £3.9 million) in exchange for entering into stock option transactions. This option income, the generation of which remains consistent with the Manager’s company-focused investment process, represented 18.1% of total income (2022 – 19.8%). As the Company’s exposure to corporate bonds has decreased over recent years, interest income from bonds was 0.5% of total income (2022 – 0.6%). Bond coupons and option premiums will remain secondary sources of income in the belief that dividends must remain the overwhelming source of income available for distribution. The resulting revenue return per Ordinary share rose by 18.8% to 12.2 pence per share for the year ended 31 January 2023 compared to 10.3 pence per share for the year ended 31 January 2022. This comprised an increase in the dividend income of 17.6% in sterling terms and an increase in option income of over 7.6%. Further details of the portfolio are shown on pages 31 to 32 of the 2023 Annual Report.

Dividend

In light of the above, the Board has declared a final dividend of 3.5 pence per share, resulting in total dividends for the year ended 31 January 2023 of 11.0 pence per share (2022 – 10.3p) — a 6.8% increase. The proposed final dividend is payable on 12 June 2023 to shareholders on the register on 5 May 2023 (ex-dividend date: 4 May 2023).

In reaching its decision, the Board balanced the wish to increase the amount distributed to shareholders with the recognition that most of the increase in revenue was due to the US dollar strengthening against the sterling during the year, a situation which could reverse at any time, with maintaining revenue reserves at the equivalent of one full year’s dividend payout. 

The Board remains committed to its progressive dividend policy and extending its track record of twelve consecutive years of dividend growth. To that end, the Board intends, in the absence of any unforeseen developments, to pay three quarterly dividends of 2.6 pence per share for the financial year ending 31 January 2024, with the fourth interim dividend being determined once the full-year results are known.

During the year the Board reviewed the schedule of dividend payments and has decided to put a resolution to the shareholders for them to approve the dividend policy in future, rather than approving the final dividend. The effect of this will be to allow the Board to accelerate the payment of the final distribution for the year and to make the quarterly payments more evenly spaced over the year, for the benefit of shareholders. If approved, the changes, illustrated by way of example in the table on page 9 of the 2023 Annual Report, will take effect for the year ending 31 January 2024.

* indicative date only

Management of Premium and Discount

The Company’s share price rose by 8.1% to 306.0 pence per share and ended the year at a 9.3% discount to total NAV, compared with a 11.2% discount at the end of the 2022 financial year. The Board continues to work with the Manager in both promoting the Company’s benefits to a wider audience and providing liquidity to the market through the use of share buybacks. Over the course of the year, the Company’s shares mainly traded at discounts ranging between 6.0% and 10.0%.

During the year, 441,185 shares were bought back and cancelled at a weighted average price of 281.90p and a weighted average discount of 11.7%. The total cost was £1.3 million. The Company has not bought back any additional Ordinary shares since 31 January 2023.

Gearing

The Board believes that sensible use of gearing should enhance returns to our shareholders over the longer term. In December 2020, the Company entered into a long-term financing agreement for US$50 million with MetLife comprising two loans of US$25 million with terms of ten and 15 years. As a result, net gearing at 31 January 2023 stood at 2.9% (2022: 4.9%).

Promotional Activity

The Board continues to promote the Company through the Manager’s investment trust share plan, which provides a series of savings schemes through which savers can invest in the Company in a low-cost and convenient manner (see page 95 of the 2023 Annual Report).

During the last year we have worked with our Manager to refine our messaging and provide clarity to shareholders around our investment objectives. This includes introducing a new descriptor line as seen on the front cover of this report: Seeking resilient growth and rising income from North American equities.

Through our marketing efforts we aim to keep all shareholders informed and updated on their investments, particularly during periods of volatility. Updates include commentary, articles and videos allowing investors to hear directly from the Investment Manager on a regular basis – to understand both the outlook and the decisions being made within the portfolio itself. All of this communication can be found on the Company’s website northamericanincome.co.uk and helps to inform shareholders’ investment decisions to ensure they remain aligned with their individual needs.

You can also follow ‘abrdn Investment Trusts’ on LinkedIn and Twitter or register for email updates here: northamericanincome.co.uk/signup

Board Activity

In April 2022, for the first time since 2019 due to the travel restrictions that the pandemic had placed upon us, the Board was pleased to travel to North America and meet with the Investment Manager and local experts face-to-face. The benefit of these meetings is evident in the engagement that follows. Since then, the Board has focused in particular on matters of sustainability and how they are perceived and approached by North American companies, as well as the economic pressures in the US, as distinct from those in the UK. We continue to monitor developments in these areas with interest. More information on the Manager’s approach to ESG integration in its investment process can be found on pages 25 to 27 of the 2023 Annual Report.

On 1 July 2022 Patrick Edwardson was appointed as an independent Non-Executive Director of the Company. Patrick has a wealth of investment management experience, including managing the Scottish American Investment Company plc for ten years, having worked for Baillie Gifford for 27 years. The Board is already benefitting from Patrick’s experience. He will stand for election as a Director for the first time at the Company’s Annual General Meeting (“AGM”) in June 2023.

Also, during the year, after my first AGM as Chair of the Company, I took the opportunity to meet with investors in the UK, on behalf of the Board, to gain a deeper understanding of their interests in the Company and address questions on a more informal basis. As usual, we encourage all shareholders to contact the Board with any queries using contact details on page 109 of the 2023 Annual Report.

Towards the end of the year, the Board undertook its board evaluation. Whilst the Board does not consider it appropriate to utilise an external agent for this, due to the current size and composition of the Board, the Board does take a more thorough approach to its evaluation every other year. The results of the board evaluation are outlined in the Statement of Corporate Governance on pages 44 to 46 of the 2023 Annual Report.

Outlook

The Federal Reserve (the “Fed”) accompanied its rate hike at the start of December 2022 with a slightly less hawkish message around future policy, a near-term positive for equity markets. Indeed, a majority of policymakers are now forecasting an easing in the pace of future rate hikes. Also, following major central banks’ rapid monetary tightening to combat high inflation, certain banks’ balance sheets came under severe pressure in March 2023 as the value of their fixed income portfolios fell and customers withdrew deposits. Technology-focused Silicon Valley Bank (SVB), as well as cryptocurrency-industry lenders Signature Bank and Silvergate Capital, collapsed. SVB’s demise was the largest banking failure since the Global Financial Crisis of 2007-2008. A consortium of US banks also injected $30 billion into regional lender First Republic Bank. In Europe, UBS mounted a $3.3 billion government-backed takeover of Credit Suisse after the latter ran into financial difficulties. These events, which led to major central banks boosting dollar liquidity to ease strains in funding markets, have caused fears of a global banking crisis and deep recession.

While, as a result, investors have lowered their expectations of further monetary tightening, the Federal Open Market Committee remains determined to tame inflation, even if this comes at the cost of a recession. The continued strength of employment suggests that wage growth will continue to run at rates well in excess of those consistent with the Fed’s inflation target. The strength of wage growth has clearly contributed to surging services inflation, alongside very aggressive increases in rent measures and rebounding services demand as Covid-19 headwinds fade and in March 2023, the Fed increased rates again by 25bps as inflation hit 6% year-on-year in February. Your Manager’s view is that this will lead to further tightening by the Fed over the coming months as policy remains restrictive, adding to its conviction that the economy will enter a downturn in the middle of this year.

So, what does this mean for equity markets going forward? Despite the recent rise in markets, sentiment has remained under pressure due to the ongoing banking crisis, hawkish Federal Reserve comments and further negative macroeconomic readings, with equity levels still materially lower than their recent peak. The economic outlook, both in the US and abroad, remains challenging and earnings downgrades have continued to come through since the end of the third-quarter earnings season. Nonetheless, US equity levels now appear to have priced in a strong probability of slowing economic growth and that inflation has peaked. On that basis, your Manager is now seeing some target companies trading on attractive multiples and increasingly appealing valuation points for long-term investors, such as ourselves, and has, therefore, become cautiously optimistic on the outlook for US equities in particular as an asset class.

Annual General Meeting (“AGM”) and Online Shareholder Presentation

AGM

The AGM is scheduled to be held at 2:00 pm on 8 June 2023 at the offices of abrdn at 1 George Street, Edinburgh, EH2 2LL. We encourage all shareholders to complete and return the form of proxy enclosed with the Annual Report to ensure that your votes are represented at the meeting (whether or not you intend to attend in person). If you hold your shares in the Company via a share plan or a platform and would like to attend and/or vote at the AGM, then you will need to make arrangements with the administrator of your share plan or platform. For this purpose, investors who hold their shares in the Company via the abrdn Investment Plan for Children, Share Plan or ISA will find a Letter of Direction enclosed. abrdn Planholders are encouraged to complete and return the Letter of Direction in accordance with the instructions.

The Notice of Meeting can be found on pages 102 to 106 of the 2023 Annual Report.

Online Shareholder Presentation

In order to encourage as much interaction as possible with our shareholders, there will also be an online shareholder presentation at 2:30 pm on 22 May 2023. At this event, you will receive a presentation from the Investment Manager and have the opportunity to ask questions of the Chair and the Investment Manager. The online presentation is being held ahead of the AGM to allow shareholders to submit their proxy votes prior to the meeting.

Full details on how to register for this event will be available on the Company’s website. Shareholders are also encouraged to submit questions in advance of the online shareholder presentation and the AGM at the following email address: northamericanincome@abrdn.com.

If you are unable to attend the online event, the Investment Manager’s presentation will be available on the Company’s website shortly after the presentation.

As usual, the Board strongly encourages all shareholders to exercise their votes in respect of the AGM in advance of the meeting, and to appoint the Chair of the meeting as their proxy, by completing the enclosed Form of Proxy (or Letter of Direction for those who hold shares through the abrdn savings plans).