BlackRock Energy & Resources Income (BERI) is the new name for BlackRock Commodities Income Trust. The share price reaction to the name change (effective 14th May) disproves those who believe names carry no importance to the attractiveness of a trust. Somewhat unexpectedly, the trust de-rated by around 3 percentage points on the announcement of the change of name which puzzles us, given that nothing else has changed as regards the management of the company.
Discount to NAV
The board made the decision to adopt the new name, believing that it better reflects the company’s investment universe, which consists predominantly of energy and mining equities as opposed to commodities. As before, the managers of BERI employ a conviction-led approach to delivering a high income from the global mining and energy sectors. They have slowly been introducing an “energy transition” theme within these sectors into the portfolio (4.2% of the portfolio currently), recognising that global efforts to mitigate the effects of climate change will offer interesting growth opportunities. With the shares now yielding 5.7%, we observe that there are very few equity trusts which offer a higher dividend yield. What is more, the trust now trades on a discount of around 10% at the time of writing.
The top ten holdings currently account for just over 50% of total assets, and as such relative to most equity funds this trust can be considered highly concentrated. Managed by Olivia Markham and Tom Holl, BERI typically has a roughly even split between mining and energy stocks. Reflecting the income mandate as well as the current outlook of the managers, a significant proportion of the trust is invested in the larger, diversified companies within each sector. The managers believe that within both of these sectors, diversified mega-caps will continue to be hugely cash-generative at current commodity price levels. With solid balance sheets and management focused on shareholders, the prospects seem set fair for dividend hungry investors.
BRCI’s objectives are to achieve both an annual dividend target and, over the long term, capital growth. The board considers a “reference index”, of 50% EMIX Global Mining and 50% MSCI World Energy Index to compare performance, but does not see it as a benchmark, given the high-income mandate of the trust. Over the longer term, during what has been a severely volatile time for mining and energy companies, the trust has not kept pace with the reference index. However, 2019 has been a good year for BRCI, and as at 5th June 2019 is +8.7%, 0.4% ahead of the reference index in NAV terms. The trust’s more conservative approach is evidenced by the fact that it has beaten the average for the AIC investment trust peer group in six of the past eight calendar years.
High yields often pose questions as to their sustainability. However, in the most recent annual report, the board has reaffirmed its commitment to a 4p dividend for the financial year ending 30th November 2019. The board also stated that it will look to protect any future shortfall in earnings with revenue or capital reserves, which in our mind indicates that the dividend yield of 5.7% looks relatively secure. At this level, the trust yields considerably more than most other areas of the market, and is firmly in the top ten highest yielding equity investment trusts (across all sectors).
As at the end of November 2018, revenue reserves stood at 0.6X the current 4p annual dividend level. With the board’s reaffirmation of the 4p dividend target, and that they would look to protect any future shortfall in earnings with revenue or capital reserves, the dividend yield of 5.7% looks relatively secure. At this level, the trust yields considerably more than most other areas of the market - Global Equity Income investment trusts for example yield 4.1%.
The managers continue to be optimistic in their outlook for the energy and mining sectors, believing 2019 will continue to see high levels of free cash flow translating into strong dividend payments. The fact that both the energy and mining sectors are under-owned by institutional investors gives the managers hope that once confidence on the global economy returns, investors will benefit from a re-rating.
The name change seems to have prompted irrational selling pressure on the shares, and as a result they now trade on a discount of around 10%. Whilst a premium to peers, the shares have rarely looked cheaper relative to their own discount history. Yielding 5.7%, BERI continues to be an attractive and differentiated source of income for a portfolio.
|Discount of 10% looks anomalous for a trust with such a high yield
||Relatively small trust
|High income, with dividend backed by a committed board
||Unlikely to perform well if global economy tips into recession
|Defensive and broadly spread portfolio, managed by specialist team
||Strong sterling could undo any earnings growth from underlying portfolio