The North American Income Trust – Investment Manager’s Review

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 ("BristolMyers"), 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.

• 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.

• Comcast, the telecommunications conglomerate, also fared well after reporting earnings that were better than expected. The company was able to offset the loss of broadband subscribers with higher pricing, while the theme parks division continues to experience robust growth. Portfolio activity

Portfolio activity

The Company's investments continue to align with our high-quality stock selection process, which emphasises generating consistent cash flow. However, market volatility created opportunities to add quality companies into the portfolio at compelling prices.

We initiated positions in five companies during the year. · the leading renewable energy and utility company NextEra Energy: NextEra Energy owns Florida Power & Light Company, the US's largest regulated electric utility, serving more than 12 million people. The utility business is high quality due to the large backlog of growth projects combined with a constructive regulatory environment allowing for relatively high returns. The company also owns NextEra Energy Resources, which is the world's largest generator of renewable energy from wind and solar assets as well as a leader in battery storage. Altogether, NextEra Energy combines two excellent businesses that support peer-leading earnings growth, along with a secure dividend.

• Genuine Parts Company, a leading global distributor of automotive and industrial replacement parts. The company has a track record of consistent execution and prudent capital allocation, which has driven its profitable growth. It has established itself as a premier supplier of automotive aftermarket parts, led by its flagship NAPA brand.

• Beverage firm Keurig Dr Pepper has products in both the cold drinks segment (led by the flagship Dr Pepper brand) and, following the merger with Keurig, in coffee. Keurig is the dominant player in the single-serve coffee segment. Historically, the cold drinks business has grown in line with, or above, the market, benefiting from the company's strength in (non-cola) flavours and its status as a preferred distributor and acquiror of niche brands.

• Essential Utilities, a diversified utility with two-thirds of its earnings from the water business and one-third from the gas business. In the short run, the gas business should grow faster given the infrastructure upgrades required. However, the water business should grow at a comparable pace over the intermediate term due to several small acquisition opportunities given that around 85% of the country is served by small, privately-run municipal operations.

• The energy infrastructure company Enbridge, a premier midstream company that operates one of the most advantaged oil pipeline networks in North America, with a strong collection of natural gas infrastructure and utility assets and a growing renewable energy platform. The company's diversified asset portfolio generates predictable cash flows thanks to its regulated and longterm contracts with customers.

• Home Depot: as we believe higher interest rates, elevated inflation and the resumption of student loan payments will prove to be large headwinds for the consumer, pressuring earnings estimates over time.

• Clothing company, VF Corporation. Despite having a portfolio of well-admired brands like Vans, The North Face, Timberland, Supreme, and Dickies, the company has faced multiple setbacks due to its poor execution.

• Hannon Armstrong Sustainable Infrastructure Capital, after concluding the stock would remain under pressure in a higher-for-longer interest-rate environment, with investors becoming increasingly concerned that higher funding costs would negatively affect the company's return profile.

• CI Financial, given the company's management has become more aggressive from a capital deployment perspective, with an acceleration in buybacks and the rapid acquisition of US wealth management businesses. While strategically sound, these actions are raising leverage at a time of higher interest rates.

• Energy infrastructure firm TC Energy, using the proceeds to fund our investment in competitor Enbridge. Factors primarily outside TC Energy's control have created delays on new projects and put upward pressure on costs, negatively affecting project-level returns.

Dividend growth

The Company's holdings continued to build upon an established track record of dividend growth during the review period, with several companies announcing double-digit increases. Semiconductor suppliers Broadcom and Analog Devices boosted their payouts by 14% and 13%, respectively. Insurance provider AIG Group increased its dividend by 13%. Derivatives exchange operator CME Group, renewable energy company NextEra Energy, and healthcare provider CVS each raised their quarterly dividend payouts by 10%.

Additionally, two holdings in the portfolio announced special dividend payments to shareholders during the review period. Derivatives exchange operator CME Group declared an annual variable dividend of US$5.25 per share in December 2023. The company uses this approach to facilitate paying out all cash that it generates over the year beyond a minimum threshold. Gaming-focused REIT Gaming and Leisure Properties Inc. declared a special earnings and profits cash dividend of $0.25 per share. Outlook US economic growth has been resilient, benefiting from several factors such as unwinding supply-chain pressures, falling energy prices, and higher productivity growth. Despite tighter credit conditions and greatly reduced household savings, we believe the chances of a soft landing versus a mild recession are becoming more balanced as inflation subsides. We believe the underlying companies in the portfolio are well positioned to manage through potential election year volatility and, equally important, we feel comfortable with the current valuations of these companies. The underlying cash flows and balance sheets remain strong and thus we expect continued dividend growth prospects for 2024. The portfolio's sector exposure is modestly defensive and we continue to seek all-weather companies, where macro tailwinds are not needed for growth.

Outlook

US economic growth has been resilient, benefiting from several factors such as unwinding supply-chain pressures, falling energy prices, and higher productivity growth. Despite tighter credit conditions and greatly reduced household savings, we believe the chances of a soft landing versus a mild recession are becoming more balanced as inflation subsides.

We believe the underlying companies in the portfolio are well positioned to manage through potential election year volatility and, equally important, we feel comfortable with the current valuations of these companies. The underlying cash flows and balance sheets remain strong and thus we expect continued dividend growth prospects for 2024.

The portfolio's sector exposure is modestly defensive and we continue to seek all-weather companies, where macro tailwinds are not needed for growth.

Performance table

Discrete performance (%)

Five year dividend table (p)

Total return; NAV to NAV, net income reinvested, GBP. Share price total return is on a mid-to-mid basis.
Dividend calculations are to reinvest as at the ex-dividend date. NAV returns based on NAVs with debt valued at fair value.
Source: abrdn Investments Limited, Lipper and Morningstar.
Past performance is not a guide to future performance.

Important information

Risk factors you should consider prior to investing:

• The value of investments and the income from them can fall and investors may get back less than the amount invested.

• Past performance is not a guide to future results.

• Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.

• The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company's assets will result in a magnified movement in the NAV.

• The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company's shares.

• The Company may charge expenses to capital which may erode the capital value of the investment.

• Derivatives may be used, subject to restrictions set out for the Company, in order to manage risk and generate income. The market in derivatives can be volatile and there is a higher than average risk of loss.

• Movements in exchange rates will impact on both the level of income received and the capital value of your investment.

• There is no guarantee that the market price of the Company's shares will fully reflect their underlying Net Asset Value.

• As with all stock exchange investments the value of the Company's shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.

• The Company invests in emerging markets which tend to be more volatile than mature markets and the value of your investment could move sharply up or down.

• Certain trusts may seek to invest in higher yielding securities such as bonds, which are subject to credit risk, market price risk and interest rate risk. Unlike income from a single bond, the level of income from an investment trust is not fixed and may fluctuate.

• With funds investing in bonds there is a risk that interest rate fluctuations could affect the capital value of investments. Where long term interest rates rise, the capital value of shares is likely to fall, and vice versa. In addition to the interest rate risk, bond investments are also exposed to credit risk reflecting the ability of the borrower (i.e. bond issuer) to meet its obligations (i.e. pay the interest on a bond and return the capital on the redemption date). The risk of this happening is usually higher with bonds classified as 'sub-investment grade'. These may produce a higher level of income but at a higher risk than investments in 'investment grade' bonds. In turn, this may have an adverse impact on funds that invest in such bonds.

• Yields are estimated figures and may fluctuate, there are no guarantees that future dividends with match or exceed historic dividends and certain investors may be subject to further tax on dividends.

Other important information:

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.

Find out more at www.northamericanincome.co.uk or by registering for updates. You can also follow us on X and LinkedIn.