Legal Entity Identifier (LEI): 5493007GCUW7G2BKY360

27 September 2022

THE NORTH AMERICAN INCOME TRUST PLC

HALF-YEARLY FINANCIAL REPORT

FOR THE SIX MONTHS TO 31 JULY 2022

The investment objective of The North American Income Trust plc is to provide investors with above average dividend income and long term capital growth through active management of a portfolio consisting predominantly of S&P 500 US equities.

Performance Highlights

Performance (Total return)

Financial Calendar, Dividends and Highlights

Financial Highlights

Chair's Statement

Market & Economic Review

Major North American equity market indices experienced significant volatility and lost ground during the six-month period ended 31 July 2022. For most of the period, investors grew concerned over the pace of the US Federal Reserve's monetary tightening. Economists warned that hiking interest rates too much, too quickly could push the US economy into recession. These worries were exacerbated by increasing lockdowns in China due to COVID-19, which further stressed an already challenged global supply chain. However, major US equity market indices rallied sharply in July 2022, buoyed in part by a positive start to the second-quarter corporate earnings season. The Russell 1000 Value Index, the Company's reference index, returned 4.9% over the review period. The energy, utilities and healthcare sectors garnered positive returns and were the top performers for the period. Conversely, the communication services, financials and technology sectors posted losses and were the primary market laggards.

Inflation in the US remained elevated during the reporting period. The US Consumer Price Index (CPI) rose by an annual rate of 8.5% in July. The year-over-year increases in the CPI ranged from 7.9% in February to 9.1% rate in June. The continued upturn in inflation during the review period was attributable mainly to sharp increases in energy costs, particularly fuel oil and gasoline, which rose at annual rates of 44% and 76%, respectively, in July. Additionally, food prices saw double-digit, year-over-year increases for five consecutive months between March and July. Rising inflation led the US Federal Reserve (Fed) to raise the federal funds rate by 25 basis points (bps) to a range of 0.25%-0.50% following its meeting in mid-March - the central bank's first rate hike since 2018. The Fed subsequently implemented additional rate hikes totalling 200 bps, lifting its benchmark interest rate to a range of 2.25% to 2.50%.

The US economy contracted by 0.6% in the second quarter of 2022. This marked the second consecutive quarterly decline in GDP - which fell 1.6% in the first quarter - meeting the definition of a 'technical recession'. The decrease in GDP resulted mainly from reductions in inventory investment (a measurement of the change in inventory levels in the economy) and residential fixed investment, which more than offset increases in exports and consumer spending.

Performance

The Company returned 5.5% on a net asset value total return basis in sterling terms for the six-month period ended 31 July 2022, outperforming the 4.9% total return of its reference index, the Russell 1000 Value Index (in sterling terms). The revenue account remained healthy, building upon the record established in prior years.

The Company's performance relative to the reference index for the period benefited from stock selection in the industrials and real estate sectors, along with an overweight position in energy. The largest contributors among individual holdings were multinational pharmaceutical firm Bristol-Myers; gaming-focused REIT Gaming and Leisure Properties; and biopharmaceutical company Abbvie.

Bristol-Myers' approval of a key drug, mavacamten, released an overhang which had pressured the shares. Gaming and Leisure Properties announced a plan to acquire two Rhode Island casino properties - Bally's Twin River Lincoln Casino Resort and Bally's Tiverton Casino & Hotel - from Bally's Corp. for US$1 billion. Shares of Abbvie outperformed despite guidance for its new drug, Rinvoq, drove longer-term sales expectations higher after the loss of patent protection for its key drug Humira.

Despite the portfolio's overweight position to the energy sector, which outperformed the market during the quarter, stock selection within the energy sector was a drag on performance. Our stock picks in the financials sector and overall positioning in utilities also weighed on the Company's relative performance. The largest individual stock detractors from performance included Canadian financial services company CI Financial, and apparel maker Hanesbrands, as well as the absence of a position in the oil and gas company ExxonMobil.

CI Financial continues to execute well on its turnaround story but pressure on equity markets and fees weighed on the stock price.

Shares of Hanesbrands underperformed as several major retailers and the company's corporate customers lowered guidance throughout the period to account for lower consumer demand and elevated inventories. The lack of exposure to ExxonMobil weighed on the company's relative performance as the stock price rose sharply despite the company delivering generally positive results for the first two quarters of its 2022 fiscal year, attributable mainly to strength in its Upstream segment.

Portfolio Activity

The Company's investments remained consistent with our high-quality, cash-generative stock selection process and market volatility created new opportunities to add quality companies into the portfolio at attractive prices. During the review period, we initiated an equity position in CVS Healthcare, a retail drugstore chain operator and pharmacy benefit manager. We believe that the company is making significant improvements to the quality of the business, pivoting the business towards more attractive, structurally growing areas of healthcare. The key strategic initiative is to decrease its retail pharmacy footprint and invest to build out primary care delivery, where there is significant opportunity for growth, as 30% of Americans do not have a primary care provider, and the industry is moving towards value-based care, which offers more attractive returns.

Positions that the Company exited during the review period included agricultural products maker Nutrien Corp. and Michigan-based regional utility company CMS Energy. We sold the Company's holding in Nutrien after a rally in fertilizer prices drove the company's earnings to what we believe to be unsustainably high levels, which we expect to revert to lower levels over time, along with the stock price. We exited the position in CMS Energy as the valuation reached peak levels, subsequently lowered the dividend yield to the point there was minimal total return potential. Finally, we sold the Company's holding in freight railroad operator Union Pacific (UNP) given multiple quarters of mixed performance due to operational challenges, combined with a high relative valuation. UNP remains a high-quality operator, but at its current valuation, we believe that there is better risk/reward potential in other cyclical companies.

Within the Company's corporate bond portfolio over the review period, we initiated a holding in Norwegian Cruise Lines Corporation, Ltd. corporate bonds, which we felt were attractively priced. We did not exit any positions during the period. The investment team continues to work closely with abrdn fixed income specialists to monitor credits and market conditions.

Revenue Account

Total revenue from equity holdings in the portfolio over the period rose over 15% to £9.1 million (the same period in 2021 - £7.9 million). The Company's holdings continued to build upon an established track record of dividend growth during the review period. Lender OneMain Holdings boosted its quarterly pay-out by 36%, representing a 10.5% annualised yield. Derivatives exchange operator CME Group raised its dividend by 11%, resulting in a 2.0% yield. Semiconductor vendor Analog Devices announced a 10% increase in its payment, equivalent to a 1.8% yield. Motor vehicle parts distributor Genuine Parts boosted its quarterly pay-out by 10%, with a yield of 2.3%. Aerospace and defence technology company L3Harris Technologies also raised its dividend by 10%, resulting in a 1.9% yield. Royal Bank of Canada raised its dividend by 9.6%, equivalent to a 4.0% annualised yield.  Medical device maker Medtronic announced a 7.4% increase in its dividend, resulting in a 2.9% annualised yield. The oil and gas company Phillips 66 raised its quarterly dividend by 5.1%, resulting in an annualised yield of 4.4%.

In addition, the Company received premiums totalling £2.0 million (same period in 2021 - £1.5 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 17.4% of total income (same period in 2021 - 15.7%). The Company continues to hold a small portfolio of corporate bonds and interest income from investments representing 0.7% of total income (2021 - 0.6%). Income from bonds and option premiums will remain secondary sources of income and dividends will continue to provide the main source of income available for distribution.

Dividend

The Board is declaring a second quarterly dividend for the year to 31 January 2023 of 2.5p per share (2022- 1.9p), giving total dividends for the first half of the year of 5.0p per share (2022 - 3.8p). The increase reflects the change in the dividend payment policy announced last year, which works to even out the level of the quarterly dividends. The second quarterly dividend is payable on 28 October 2022 to shareholders on the register on 7 October 2022. It is expected that the third interim dividend, which will be paid in February 2023, will be 2.5p per share and the fourth interim dividend will continue to act as a balancing figure and will be determined once the income for the year has been determined. At the time of writing,
the strong dividend growth from the companies in the Company's portfolio, which was attributable to increased payouts as well as US dollar strength, gives the Board confidence that the dividend for the year will be covered by the net revenue return for the year.

Management of Premium and Discount

The Company's share price rose by 5.3% to 298p and ended the half year at an 8.9% discount to total net asset value, compared with an 11.2% discount at the end of the 2022 financial year. Over the six month review period, the Company's shares mainly traded at a discount between -6.0% to -10%, on a cumulative income basis. During the period 441,185 shares were bought back and cancelled at a weighted average price of 281.9p and a weighted average discount of 11.7%. The total cost was £1.25 million. The Company has not bought back any shares since the period end.

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 2022 stood at 5.6% (31 January 2022 - 4.9%).

Promotional Activity

The Board continues to promote the Company through a variety of engagement activities and initiatives, including the Manager's savings schemes through which savers can invest in the Company in a low-cost and convenient manner (see page 29 of the Half-Yearly Financial Report). Up-to-date information about the Company, including monthly factsheets, interviews with the Manager and the latest net asset value and price of the Ordinary shares may be found on the Company's website northamericanincome.co.uk which has been updated and refreshed over the last couple of months.

Board

On 1 July 2022 Patrick Edwardson was appointed a Director of the Company. Patrick has a wealth of investment management experience, including managing the Scottish American Investment Company plc for 10 years having worked for Baillie Gifford for 27 years. The Board look forward to working with him. He will stand for election to the Board at the Company's Annual General Meeting in June 2023.

Outlook

The investment environment has become more challenging given the recession "warning signs" that are flashing, as well as the fact that a period of aggressive interest-rate tightening is well underway. However, periods of positive returns are possible during recessions particularly when companies become undervalued. Although July was overall a very positive month for the US equity market, there are still several headwinds, including the ongoing Russia-Ukraine conflict and questions over the ability of central banks globally to strike the right balance between bringing inflation under control and stymying economic growth.

The value of the portfolio and the strength of the revenue account were enhanced by the continuing strength of the US dollar relative to sterling, which approached parity in late September. The factors that drive relative exchange rate movements, including the ongoing structural impact of Brexit and the recent budget changes announced by the Chancellor of the Exchequer, could lead to an environment where the US dollar will maintain its relative strength against sterling in the near term. Your Manager believes that this latest move of sterling to the dollar is currently a benefit to the Company's Net Asset Value; however, currency markets are inherently volatile.

We continue to engage with companies on ESG matters and monitor their evolution in this area.  More information on your Manager's approach to ESG engagement can be found on pages 25 to 29 of the Company's Annual Report and at abrdn.com/en/uk/investor/responsible-investing.

For now, we have been comforted by the strength of the second-quarter earnings season in the US and the fact that the management teams with whom the Manager has recently spoken remain reasonably confident in their forecasts for the current year.

Dame Susan Rice
Chair
26 September 2022

Other Matters

Principal Risks and Uncertainties

There are a number of risks which, if realised, could have a material adverse effect on the Company and its financial condition, performance and prospects. The Board has considered the principal risks and uncertainties facing the Company together with a description of the mitigating actions it has taken. They can be summarised under the following headings:

-       Market Risk

-       Pandemic or Systemic Shock

-       Income and Dividend Risk

-       Operational Risk

-       Regulatory Risk

-       Gearing Risk

-       Discount Volatility

-       Derivatives

-       Potential Impact of ESG Investment Principles

Details of these risks are provided on pages 12 to 15 of the 2022 Annual Report.  

The Board monitors these principal risks closely and has a process to identify and assess emerging risks, such as climate change and geopolitical developments.

The increasing political and economic uncertainty which could affect markets, particularly in reaction to higher interest rates and the volatility associated with the conflict in Ukraine, received particular focus in the reporting period.

The Board is also aware of the elevated threat posed by climate change and continues to monitor, through the Investment Manager, the potential risk that the companies in the portfolio may fail to adapt to changes in policy and regulation.

In all other respects, the Company's principal risks and uncertainties have not changed nor are they expected to change in the second half of the financial year ending 31 January 2023.

Going Concern

In accordance with the Financial Reporting Council's Guidance on Risk Management, Internal Control and Related Financial and Business, the Directors have undertaken a rigorous review and consider both that there are no material uncertainties and that the adoption of the going concern basis of accounting is appropriate. The Company's assets consist substantially of equity shares in companies listed on recognised stock exchanges and, in most circumstances, are realisable within a short timescale. 

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 10 and 15 years.

The Directors have a reasonable expectation that the Company has adequate financial resources to continue in operational existence for the foreseeable future and the ability to meet all its liabilities and ongoing expenses from its assets.  Given that the Company's portfolio comprises primarily "Level One" assets (listed on a recognisable exchange and realisable within a short timescale), and the Company's relatively low level of gearing, the Directors believe that adopting a going concern basis of accounting remains appropriate.

Accordingly, they continue to adopt the going concern basis in preparing the financial statements.

Directors' Responsibility Statement

The Directors are responsible for preparing the Half-Yearly Financial Report in accordance with applicable law and regulations. The Directors confirm that to the best of their knowledge:

-       the condensed set of financial statements has been prepared in accordance with Financial Reporting Standard 104 (Interim Financial Reporting);

-       the Half-Yearly Board Report, comprising the Chair's Statement, Other Matters and Portfolio Information, includes a fair review of the information required by rule 4.2.7R of the Disclosure Guidance and Transparency Rules (being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of Financial Statements and a description of the principal risks and uncertainties for the remaining six months of the financial year); and

-       the financial statements include a fair review of the information required by 4.2.8R of the Disclosure Guidance and Transparency Rules (being related party transactions that have taken place during the first six months of the financial year and that have materially affected the financial position of the Company during that period; and any changes in the related party transactions described in the last Annual Report that could do so).

The Half-Yearly Financial Report for the six months ended 31 July 2022 comprises the Half-Yearly Board Report, the Directors' Responsibility Statement and a condensed set of financial statements which has not been reviewed or auditor by the Company's auditor.

For and on behalf of the Board
of The North American Income Trust plc

Dame Susan Rice,
Chair
26 September 2022

Ten Largest Investments

As at 31 July 2022

List of Investments

Geographical Analysis

Investment Case Studies

Emerson Electric

Emerson Electric is a diversified industrial company selling primarily electrical equipment into industrial and residential end markets. At the time of writing, Emerson Electric pays a 2.8% dividend and has raised the dividend for 65 consecutive years.

The company's Automation Solutions segment, at roughly two thirds of the business, includes automation instrumentation and software used in a variety of applications such as fluid processing (energy, industrial gasses, hydrogen, LNG) and product manufacturing (pharmaceuticals, food and beverage, automotive). The other segment consists mainly of power tools, HVAC products, and other home appliances. The company's automation expertise and narrow set of competitors has led to a sizable installed base of its equipment which generates a meaningful portion of replacement revenues and aftermarket service revenues.

The position in Emerson Electric was initiated due to its leading position in end markets poised for strong demand growth, something which was not being adequately reflected in the share price. Organic revenue growth has historically been in the 4-6% range which should accelerate closer to 10% over the medium term due to the need for greater production of LNG, hydrogen, oil and gas, and other energy resources. The company's robust internal decarbonisation targets have permeated its own product development, leveraging its process automation technology for clean energy end markets such as hydrogen, solar, and wind. This should allow the company to become a winner in the energy transition and help to drive clean energy technology costs down, maintaining its leading position in process automation. Lastly, continuous operational improvement and the exit of low-quality businesses has led to structurally higher earnings power on top of its growing revenue base which we view to be sustainable over time.

MetLife ("MET")

Metlife provides life insurance, employee benefits, and financial services both in the US and internationally. MET has taken actions to simplify its business model in recent years, including spinning off Brighthouse in 2017, selling the P&C business to Farmers, and creating MetLife Holdings, a segment which includes run-off businesses such as variable annuities, defined contribution, and fixed annuities. What is left is a collection of businesses which the Manager believes have favourable growth characteristics (less capital markets and less macro sensitive) and that should provide a higher return profile.

The Manager believes that this level of growth can be sustained over the cycle driven by international growth, particularly in Latin America and China, where MET has strong distribution partnerships and the penetration of life insurance is lower than in developed countries. In addition, growth in the US will provide some support, mainly in Group insurance, where MET has a leading market share, but is still underpenetrated in small business.

Despite the strong growth and return characteristics, MET continues to trade at a discount to peers with less favourable growth and return profiles. The Manager believes that this discount will close over time. It sees material upside on a combination of sustained book value growth, a solid dividend yield, and an eventual multiple re-rating.

Condensed Statement of Comprehensive Income (unaudited)

Condensed Statement of Financial Position (unaudited)

Condensed Statement of Changes in Equity (unaudited)

Condensed Statement of Cash Flows (unaudited)

Notes to the Financial Statements (unaudited)

For the year ended 31 July 2022

17.        The Half-Yearly Financial Report is available on the Company's website, www.northamericanincome.co.uk.  The Half-Yearly Report will be posted to shareholders in October 2022 and copies will be available from the Company Secretary.

Please note that past performance is not necessarily a guide to the future and that the value of investments and the income from them may fall as well as rise and may be affected by exchange rate movements.  Investors may not get back the amount they originally invested.

For The North American Income Trust plc

Aberdeen Asset Management PLC, Company Secretary

For further information, please contact:-

Company Secretary, abrdn

Tel: 0131 372 2200

Alternative Performance Measures ("APMs")