The North American Income Trust: Chair's Statement

Overview

In the six months ended 31 July 2023, The North American Income Trust plc (the "Company") navigated high macroeconomic uncertainty amid monetary tightening, banking sector issues and fears of a looming recession. Against this backdrop, the Company's net asset value ("NAV") total return per share declined 3.2% in sterling terms compared with a 1.0% decline in the total return of its reference index, the Russell 1000 Value Index. Meanwhile, the Company's share price total return fell 7.8% in sterling terms over the period, with the discount to NAV widening from 9.3% to 11.3%. Despite this, I am pleased to note that the Company continues to deliver a dividend yield that is almost double that of the reference index and among the highest dividend yields within its peer group. This highlights your Manager's focus on investing in high quality companies with a strong dividend track record. However, such a focus on income generation can sometimes be at the expense of capital growth in the portfolio. While the Company's revenue return per Ordinary share was unchanged at 6.10 pence over the six months to 31 July 2023, this reflects the increase in US dollar income being offset by 4.5% appreciation of sterling against the US dollar during the period.

Inflation, and the efforts of the Federal Reserve (the "Fed") to control it, was one of the key themes of the period. We have witnessed ten consecutive rate hikes which led to the target range of the Fed Funds rate reaching 5.25% -5.50% in July 2023. Despite the Fed's somewhat hawkish stance, your Manager expects limited further rate increases over the rest of the year. The other theme that affected markets was the collapse of Silicon Valley Bank and a small number of regional banks in March 2023, which acted as a brake on market sentiment. While these events raised the risk of a credit crunch and the possibility of a recession, investors were reassured by the regulators' timely actions to stabilise the financial sector.

During the period, the Company's equity portfolio generated £8.8 million in revenue, down 3.8% from £9.1 million in the same period in 2022. This decline was partly as a result of sterling strengthening to the US dollar, from $1.23 to $1.28 during the period, continuing a trend that began in October 2022. The Company maintained a low exposure to corporate bonds, which represented 2.2% of income in the period, slightly more than last year. Total income was less than 1% lower than for the same period last year. Meanwhile, the Company's revenue return per Ordinary share was unchanged at 6.10 pence, with the lower interest and tax charges offsetting most of the small decline in income.

Dividend

The Board is declaring a second quarterly dividend for the year to 31 January 2024 of 2.6 pence per share (2023- 2.5 pence), taking total dividends for the first half of the year to 5.2 pence per share (2022 - 5.0 pence). The second quarterly dividend is payable on 27 October 2023 to shareholders on the register on 13 October 2023. It is expected that the third interim dividend, which will be paid in February 2024, will be 2.6 pence per share and the fourth interim dividend will continue to act as a balancing figure once the income for the full year has been determined.

Management of Premium and Discount

The Company's share price fell 7.8% to 298.0 pence and ended the half year at an 11.3% discount to total NAV, compared with a 9.3% discount at the financial year end, 31 January 2023. Over the period, the Company's shares traded at discounts between around -8% and -12%, on a cumulative income basis. 197,574 Ordinary shares were bought back and cancelled at a weighted average price of 283.4 pence and a weighted average discount of 9.4%. The total cost was £565,000. Since 31 July 2023, the Company has bought back a further 659,338 Ordinary shares, at a weighted average discount of 11.8%.

Gearing

The Board believes that sensible use of gearing should enhance returns to shareholders over the longer term. In December 2020, the Company entered into a long-term financing agreement for US$50 million with MetLife for two loans of US$25 million with terms of 10 and 15 years. As a result, net gearing at 31 July 2023 stood at 5.5% (31 January 2023 - 2.9%).

Promotional Activity

The Board continues to update shareholders and promote the Company through the Manager's marketing programme by means of articles and videos from the fund manager, webinars, shareholder meetings and an online presentation prior to the Annual General Meeting ("AGM"). You can register for updates on the Company's website northamericanincome.co.uk which has been updated and refreshed over the last couple of months. The website is also the best source for up-to-date information about the Company, including monthly factsheets, interviews with the Manager and the latest NAV and price of the Ordinary shares.

Environmental, Social and Governance

On the environmental, social and governance ("ESG") front, your Manager continues to engage with companies in the portfolio based on a range of criteria, including strong governance practices and efficient resource management. The Investment Manager uses ESG tools, with a particular focus on climate-related criteria, to assess the carbon footprint of the portfolio. The Manager also published the first Taskforce on Climate-related Financial Disclosures ("TCFD") report on the Company's carbon footprint data, which can be found at invtrusts.co.uk/en-gb/prices-and-literature/company-literature. This report is produced to support investors in appropriately assessing and pricing a specific set of risks related to climate change.

Board

The Board continues to review its succession planning. In March 2024, I will have served nine years as a Director of the Company and, in accordance with the UK Corporate Governance Code, I intend to retire from the Board at the conclusion of the AGM in June 2024.

As part of its succession planning, the Board has carefully considered my successor and I am delighted to report that Charles Park will be appointed as Chair with effect from the conclusion of the 2024 AGM. Charlie joined the Board in June 2017. He has extensive experience of investing in the US including through his valued experience as a Director of the Company.

In May 2023, the Board visited your Manager in the US, an excellent opportunity to meet the team face to face. The visit allowed the Board to develop a deeper knowledge of the Manager's investment process and culture, as well as broaden their understanding on how specific market developments in the US are impacting the companies in the portfolio. We also appreciated the opportunity to spend some time meeting directly with management of one of the companies and hearing from experts on the political and economic backdrop.

Outlook

Macroeconomic uncertainty persists given elevated inflation, tight monetary policies and geopolitical tensions. At the same time, the US is starting the extended run-in to the next presidential election in November 2024 and we are alert to the prospects of vote-garnering announcements by prospective candidates from both sides over the coming months.

While investor sentiment now favours an end to the Fed's interest-rate hiking cycle, some further rate increases cannot be ruled out due to still-high core inflation and the Fed's commitment to achieving its 2% target. Meanwhile, inflation could increase further due to the recent rise in oil prices. In addition to price increases, more restrictive lending policies as a result of the banking sector collapses in March and the restarting of student loan repayments could hinder consumer spending. However, the US economy has remained resilient during the review period, with a notably strong labour market which is an improvement on forecasts at the start of the year.

Against this backdrop, the Board believes a mild recession is still likely to begin at some point by the end of the year or in early 2024. Your Manager has positioned the Company's portfolio to focus on high quality companies with good corporate governance, strong balance sheets and a solid dividend growth history, with a view to protecting the portfolio from the worst impacts of such an economic backdrop. This strategy has enabled the Company to pay a progressive annual dividend over the past eleven years. The Board is convinced that a focus on quality and income generation is the best approach to navigate uncertain times and weather a potential recession.

Important information:

Risk factors you should consider prior to investing.

Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London, EC2M 4AG. abrdn Investments Limited, registered in Scotland (No. 108419), 10 Queen's Terrace, Aberdeen AB10 1XL. Both companies are authorised and regulated by the Financial Conduct Authority in the UK.