This article is part of Morningstar’s Guide to Income Investing. Whether you are looking grow your pension pot, or invest for retirement income, this week we have all the news, information and education you need.
Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall, and I am joined today by Tony DeSpirito, Manager of the BlackRock North American Income Trust.
Hi, Tony.
Tony DeSpirito: Hi.
Wall: So, we're here today to the highlight three sectors within U.S. equities that you think are compelling. What's the first sector?
DeSpirito: Healthcare.
Wall: And why do you like healthcare?
DeSpirito: Sure. Well, we like businesses that are stable, that are growing, and have a good free cash flow; healthcare fits, totally fits the bill there, and there are lot of other sectors like consumer staples that fit that bill, but healthcare is growing faster. It's just a stable and the valuations are significantly more attractive, and so we've been shifting money from consumer staples into healthcare.
Wall: Certainly in Europe, pharmaceutical sort of fell out of favor a couple of years ago because people couldn't see where the future revenues are going to come from and actually they proved to be great supplier of income. What's the situation like in the U.S. with patents?
DeSpirito: Pretty similar, it really is a global business and what we've seen is that we think about it in terms of the productivity of the R&D, and there indeed was a dip in the productivity of R&D, but all the companies pared back, got a little better at R&D and so we're starting to see the fruits of those efforts now.
Wall: What's the second sector that you like?
DeSpirito: Financials.
Wall: That's a quite controversial one.
DeSpirito: Sure.
Wall: I think even people would be with the shortest memories will remember everything that's happened, sort of, five or six years ago, but you are now feeling positive on them?
DeSpirito: We are and I think that's part of the painful memory of what happened in '08 is definitely what part makes these sectors attractive. What we see there is a sector that's really transformed itself. It's made a real significant change which is a change in the balance sheets.
The balance sheets they are required to have a lot more capital, they also – the assets that they are putting on their books are lot less risky and the liabilities are more liquid. Now most investors have looked then said, oh, well they will never be as profitable as they once were and so they are getting very low valuations.
In fact, the most discounted of any sector. We look at it, and say this is great because they are most stable now. They are going to be more utility-like going forward and the capital they hold today is sufficient, and even if we experience another violent global financial crisis like we did in '08, they should still have enough capital to survive and live another day.
Wall: So, is it back to sort of old school banking? You only lend out the money that you take in or is it are you seeing compelling reasons to invest in, sort of, investment banks as well?
DeSpirito: Yeah. We're finding the best opportunities in the universal banks. So it's a combination of lending out your balance sheet which is traditional banking, but there is also a lot of fee income either through trading revenues, brokerage asset management, et cetera. So, it's really a combination.
Wall: What's the third sector today?
DeSpirito: Technology.
Wall: I can see you're wearing technology there. Is that backing out the conviction that you have in this sector.
DeSpirito: Well, we are convicted in sector. We do not own this particular stock, but what we see is a number of very large global franchise in the U.S. They are growing a little more slowly than they had historically, but they are still growing. It's also the sector that we see the best balance sheets and that's leading – the balance sheets combined with the underlying fundamentals are leading to very strong dividend growth.
Wall: It's quite interesting, isn't it, because 12 years ago, if you'd have said that a tech company would be in an income trust, no one would have ever believed you, there are much more about growth, but now they are global players, they are mega caps and they can compete with the other sectors we've been talking about.
DeSpirito: Yeah, and they have become franchises and that's what's really important to us because franchises imply durability of that income stream.
Wall: Tony, thank you very much.
DeSpirito: Thank you, my pleasure.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
