BlackRock Income and Growth Investment Trust returned 5.3% during the month, outperforming the FTSE All-Share

BlackRock Income and Growth Investment Trust plc (LON:BRIG) has announced its latest portfolio update.

All information is at 31 December 2021 and unaudited.

For more information on the BlackRock Income and Growth Investment Trust and how to access the opportunities presented by the income and growth sector, please visit: www.blackrock.com/uk/brig

Performance at month end with net income reinvested

BlackRock took over the investment management of the Company with effect from 1 April 2012.

At month end

Sterling:

^* Includes net revenue of 5.08 pence per share.

** The Company’s yield based on dividends announced in the last 12 months as at the date of the release of this announcement is 3.8% and includes the 2020 final dividend of 4.60p per share declared on 01 February 2021 and paid to shareholders on 17 March 2021 and the 2021 interim dividend of 2.60p per share declared on 23 June 2021 and paid to shareholders on 1 September 2021.

*** excludes 10,081,532 shares held in treasury.

**** Calculated as a percentage of average net assets and using expenses, excluding performance fees and interest costs for the year ended 31 October 2021.

Commenting on the markets, representing the Investment Manager noted:

Performance Overview:

The Company returned 5.3% during the month, outperforming the FTSE All-Share which returned 4.7%.

Global equity markets rose in December after the severity of the Omicron variant proved less significant than feared.  Following the Omicron-induced selloff in late November, risk assets continued to remain under pressure in early December as implied volatility spiked to its highest level in 9 months as the market focused on the risks of the new variant and the possible implications of the Fed’s change in tone regarding inflation not being labelled as “transitionary” anymore.  However, risk assets rallied later in the month as some of the initial concerns around the new variant faded; despite daily Covid cases reaching record highs, hospitalization rates remained contained.

The S&P 500 Index hit new record highs during the closing week of the year on the back of strong retail sales. Meanwhile, inflation hit 39-year highs in the US as November CPI was up 6.8% ¹. The Fed committed to slowing down its bond purchases at a somewhat quicker pace than earlier communicated and indicated three potential rate hikes next year. The ECB also presented a roadmap on the pace of reduction of its securities purchases from March 2022.

The Bank of England raised its key rate to 0.25%² after inflation in the UK hit a 10-year high of 5.1%².

The FTSE All Share rose 4.7% with Consumer Services, Utilities, Consumer Goods, and Technology as top performing sectors.

Stocks:

Ferguson was the top positive contributor during the month and a strong performer during year for the Company as the company rose nearly 50% during 2021 reflecting its consistently strong operational performance. Having gone through a weaker period, Mastercard delivered strong results in November and held an analyst day which proved encouraging; the company reiterated medium-term guidance of low-to-mid teens revenue growth with EPS growth of c.20%. Taylor Wimpey performed strongly reflecting the continued resilience in housing demand and confidence that prices should not be impacted by rate rises in 2022. Shares were also supported by the emergence of an activist.

Rentokil fell after announcing the $6.7bn acquisition of Terminix, a US pest control peer. This deal will be financed both from cash and issuing equity to Terminix shareholders. We believe this deal has strategic and financial merit and we support management’s view of its significant potential. We note the technical pressure on Rentokil’s shares from the deal structure. Adobe was another top detractor after releasing conservative guidance for 2022, however, we believe that the company continues to be extremely well-placed to grow quickly over the long-term. Hays also fell on the back of concerns around the Omicron variant and lockdowns in some of its markets including Germany and Australia, though is well placed to benefit from tightening labour markets.

Portfolio Activity:

During the month, we did not make any new purchases or sales in the Company. We added to Hays given the strong backdrop in hiring and wage inflation which we believe will continue. The shares remain attractively valued with net cash and a significant premium yield. We also added to Rentokil after weakness in shares following the announcement of the Terminix deal. We trimmed the position in Ferguson following its strong performance in 2021.

Outlook:

As we enter 2022, the backdrop for global equities continues to look positive, supported by solid corporate demand and healthy consumers. We expect revenue and earnings growth to be robust in 2022, albeit more modest than the fireworks of 2021 as comparatives normalise while government stimulus is retracted and monetary policy tightened.

Covid is likely to remain an important factor for global markets in 2022, especially given the recent surge in cases driven by the Omicron variant. We continue to monitor case and hospitalisation data and note the current balancing act between a variant that is clearly highly transmissible yet appears to be much less severe, undoubtedly helped by vaccine programs and accumulated immunity. At present, Omicron has not meaningfully changed our outlook and we would note that the impact on the global economy has typically lessened with each Covid ‘wave’ as governments, corporates and consumers have adapted. We are mindful that different countries have approached Covid differently and believe that this will have implications for the global economy as Covid persists, yet normalisation/reopening plans differ globally. We also believe that there are still attractive stock-specific opportunities stemming from the normalisation of behaviours and activity.

The strain on supply chains, caused by strong economic activity overwhelming COVID afflicted capacity and restricted labour availability, will continue to provide inflationary pressures which can squeeze companies’ margins. We expect inflation and the evolution between transitory and structural components to be important drivers in 2022. As a reminder, we continue to concentrate the portfolio on businesses with pricing power and durable, competitive advantages as we see these as best placed to protect margins and returns over the medium and long-term. However, a notable feature of our conversations with a wide range of corporates in 2021 was the ease with which they were able to pass on cost increases and protect or expand margins.  Management teams have pointed to robust demand, prioritisation of security of supply as well as well-publicised supply chain disruption and cost pressures. However, we believe that as some of the transitory inflationary pressures start to fade (e.g. commodity prices, supply chain disruption) then pricing conversations will become more challenging. We are also increasingly focused on wage inflation which may be more structural and yet, in our experience, harder to pass on. Corporates have already pointed to wages picking up, the introduction of bonuses and growing pressure on employee retention rates as competition for labour intensifies. We therefore believe that employee retention will be an important differentiator in 2022 given the productivity benefits of a stable workforce as labour markets tighten further.

We also note the UK’s relative valuation discount to global equity markets has continued to widen over the course of 2021, despite the resurgence in takeover activity as bidders capitalise on this arbitrage. Specifically, we’ve seen acquisitions of real assets and a desire to find unlevered free cash flow. As we move into 2022, we see cash generation continuing to improve and dividends payments recovering; broadly speaking we’ve been surprised by how quickly dividends have come back with large contributions from the mining sector where the likes of Rio Tinto and BHP have been able to pay large special dividends. While dividends are not far off from pre-Covid levels as most companies are paying dividends once more, we note the large contribution from special dividends that may not persist. That said, as the highest dividend yielding market in the developed world, we see the fundamental valuation of the UK as attractive. We also view the outlook for ordinary dividends for the UK market with optimism as most companies have emerged from the Covid crisis with appropriate dividend policies.

We continue to have conviction in cash-generative companies that have delivered for the Company and we foresee delivering into the future. As always, we are focused on stock-specifics and selecting holdings that are best placed to perform well amidst market normalisation. At present, we feel liquidity conditions are relatively supportive and we are excited by the approaching economic recovery and the opportunity to deliver strong capital and dividend growth for our clients over the long-term.     

¹ Source: Financial Times, 20 December 2021:
https://www.ft.com/content/f355feab-e9f0-4dfc-bcd7-1759983dfb16.
² Source: BBC, 16 December 2021:
https://www.bbc.com/news/business-59682521

For more information on the BlackRock Income and Growth Investment Trust and how to access the opportunities presented by the income and growth sector, please visit: www.blackrock.com/uk/brig