The BlackRock American Income Trust (BRAI, the UK’s first systematic investment trust) has published its half-year results, marking the first full reporting period under its new Systematic Active Equity investment strategy.
The strategy combines big data, machine learning and artificial intelligence with human expertise to identify investment opportunity across the US equity market. Over the period, the Trust outperformed its benchmark while continuing to deliver an enhanced level of income for shareholders.
Muzo Kayacan, Manager of the BlackRock American Income Trust (BRAI), comments on the Company’s interim results:
“All categories of signals – bottom-up fundamental and sentiment, as well as top-down macro – made positive contributions over the period. Tracking trends across related companies (peers, suppliers and customers) worked well, helping to steer the Company away from some of the software and professional services firms that were deemed most at risk from disruption by AI tools, as well as capturing the emerging tailwinds for oil companies.
“Insights focused on companies’ valuations when R&D spending is taken into account was another signal that helped the portfolio to avoid software firms threatened by AI, the implication being that these firms may lack technological moats. Hedge fund trading activity was one category of sentiment-focused insights that were nicely positioned for a very strong rally in a variety of semiconductor firms.
“On the negative side, in a market that was more focused on geopolitics and AI, some more fundamental signals that focus on factors such as the involvement of founders in managing companies, management sentiment on earnings calls, and the momentum in online job postings did not fare so well.
“From a sector perspective, positions in Financials (underweights in firms exposed to crypto markets in particular), Technology (IT) (overweights in semiconductor and storage firms) and strong selection within Health Care all made the largest contributions to performance. On the negative side, positions within Industrials were the only significant detractor.”
Industrials: 1.4% overweight (14.7% of the portfolio)
The portfolio holds an overweight in conglomerate 3M, which looks particularly attractive on fundamental momentum and investor sentiment metrics, as well as top-down macro signals. AI-driven theme identification is a notable contributor to the positive view.
Information Technology: 1.3% overweight (15.5% of the portfolio)
The portfolio has an overweight position in semiconductor firm Applied Materials, which looks attractive across all signal types. The identification of significant market themes by using AI to read sell-side strategy research, as well as analysis of hedge fund trading activity, are two of the key drivers of the positive outlook.
Health Care: 0.9% overweight (11.7% of the portfolio)
The portfolio is overweight pharmaceuticals firm Bristol-Myers Squibb, which scores positively on fundamental momentum, quality and value. The company’s invitations to present at medical conferences and stock valuation relative to R&D spending suggest a firm that is both attractively valued and investing effectively in innovation.
Energy: 0.6% overweight (7.5% of the portfolio)
The portfolio is overweight Chevron, which looks attractive from a fundamental momentum and investor sentiment perspective. AI-driven thematic exposure and hedge fund trading activity underpin the bullish view.
Consumer Discretionary: 0.2% overweight (7.3% of the portfolio)
The portfolio holds an overweight in retailer TJX Companies, which scores positively on investor sentiment and quality signals. A lack of turnover in management and strong trends in mobile app usage both support this view.
Consumer Staples: 0.2% underweight (7.0% of the portfolio)
The portfolio is underweight tobacco firm Philip Morris, driven by fundamental momentum, quality and investor sentiment. AI-driven thematic exposure and hedge fund trading activity are key drivers of the negative view. However it was overweight in retailer Costco, which benefited from strong value and positive top-down macro views.
Materials: 0.3% underweight (3.9% of the portfolio)
The portfolio is underweight chemical firm Linde, which has negative scores across all signal types. Trends across peers, suppliers and customers point to a weak outlook. Conversely, the portfolio is overweight diversified miner Freeport-McMoRan thanks to positive fundamental momentum and investor sentiment signals.
Financials: 0.6% underweight (18.9% of the portfolio)
The portfolio is underweight BlackRock, which cannot be held. However, the portfolio is overweight Morgan Stanley, which scores positively on every model theme. AI-identified thematic exposures, efficient balance sheet use and hedge fund trading insights all favour the stock.
Communication Services: 0.7% underweight (7.7% of the portfolio)
The portfolio is underweight telecoms firm Verizon, which scores poorly on valuation and investor sentiment. That said, the portfolio holds an overweight in Google parent company Alphabet, which scores positively on quality and investor sentiment metrics.
Real Estate: 1.2% underweight (2.8% of the portfolio)
The model’s top-down view on the sector is negative and health care REIT Welltower is the largest underweight, due to AI-driven identification of themes, and regime-based sector views, but peer CubeSmart is an overweight thanks to positive investor sentiment and fundamental momentum views.
Utilities: 1.4% underweight (3.0% of the portfolio)
The top-down view on utilities is also negative, with electric utility NextEra Energy being a key underweight, thanks to unfavourable views from credit markets as well as short selling activity, but positive quality and fundamental views push fellow electric utility Portland General Electric to be an overweight.
Outlook
After soaring above US$120 a barrel in late April, oil prices (represented by Brent crude) have retreated below US$80 as we write this in late June. We do not yet have a complete resolution to the Iran conflict, but the preliminary agreement with the US is positive progress towards a situation where ships can once again sail through the Strait of Hormuz and supply the world with oil and gas, as well as various other crucial commodities and products.
However, at 3.8%, US consumer price inflation for April was at the highest level since mid-2023, and the ‘dot plots’ that followed the most recent meeting of the Federal Reserve implied that higher rates could be coming. At the same time, as we have seen numerous times, equity indices continue to advance, unfazed by economic storm clouds thanks to the ongoing excitement about artificial intelligence.
Neither of these themes are necessarily a bad thing for value stocks. In 2022, when the conflict in Ukraine caused oil prices to soar, adding to inflationary pressures already emerging as economies recovered from Covid lockdowns, and resulting in substantial increases in interest rates, value stocks significantly outperformed the broader market.
Higher inflation and interest rates erode the value of future cash flows at a faster pace, so growth companies with a greater proportion of their intrinsic value tied up in the more distant future become less attractive to investors.
However, it is worth noting that this time around there is greater slack in the labour market and interest rates are already at much higher levels than they were at the start of 2022. Furthermore, equity markets tend to be forward-looking, so further improvement in the energy supply situation may allow both equity and bond investors (and the Federal Reserve) to overlook a couple more inflation prints starting with a 3 or 4, especially if there are no signs of rising prices feeding through to rising wages. In that case, one might expect growth stocks to resume their dominance.
In fact, despite all the headlines around market concentration and mega-cap tech stocks becoming ‘giga’ caps worth trillions of dollars, since the start of 2025, inflation and interest rates (although not long-term government bond yields) have fallen, but the Russell 1000 Value index has achieved a very similar return to the S&P 500 Index, thanks in part to the ebb and flow of sentiment towards AI, as well as political and geopolitical events.
It is also the case that, after some very richly priced mega-cap growth stocks were unquestionably the biggest winners early on in the AI trade, a number of more attractively valued and more old-fashioned computer hardware, storage and chip stocks have soared recently as the number of beneficiaries of the huge demand for data centres have broadened out. At the same time, cheap oil stocks benefited from oil becoming anything but cheap. There have been some expensive health care stocks that have struggled lately, too.
Moreover, the news flow and market gyrations have presented our models with a broad range of opportunities to capitalise on emerging themes and exploit overreactions and mispricing. So although, as is almost always the case, there are reasons to be worried about so many things – market bubbles, inflation, war, politics, mass redundancies thanks to artificial intelligence – holding a broad portfolio of attractively valued stocks across multiple sectors seems like a sensible approach in the current climate.
