Over the past 12 months BlackRock Energy and Resources Income (BERI) has seen a significant shift in emphasis, which we believe has led to a change in its fortunes. Historically, BERI sought to provide a dividend and long-term capital growth through investment in mining and (traditional) energy companies globally. However, starting 1 June 2020 a third category of companies has been introduced- to include companies helping the transition to a low carbon economy.
This change has led to a broader spread portfolio and enabled the managers to make some decisive changes during 2020. As discussed in Performance, this has led to a good NAV performance in absolute and relative terms. However, aside from performance, we believe that, due to the shift of emphasis in the mandate, BERI feels much more relevant to today’s investor.
The neutral weighting of BERI’s exposure to energy transition stocks is currently set at around one-third of the portfolio. Nevertheless, the team expect to be pragmatic in achieving this, exemplified by activity in early November 2020, when news of an effective vaccine was announced. The team quickly increased BERI’s traditional energy exposure by 10% of NAV, a decisive move that has helped BERI to perform strongly during the market rotation that started then.
As discussed in Dividend, whilst the trust aims to pay a relatively high income, the board have stated that they are happy to use revenue and capital reserves to support it. This means that the team have relatively few constraints in picking stocks, and whilst the traditional energy and mining sectors offer high yields, the managers are free to invest as they see fit for total returns rather than a specific income objective.
BERI had historically struggled relative to its reference index. However, the move to broaden the investment mandate and the appointment of energy specialist Mark Hume has been well-timed. Performance since June 2020 has been strong in relative and absolute terms, and with BERI’s assets now north of £100m and the shares nudging onto a premium, we think it is fair to say that BERI’s fortunes have improved immeasurably.
The underlying drivers of the energy transition theme expose BERI to long-term growth opportunities in both the mining and energy sectors. That said, the team are looking for the best investment opportunities across their universe of stocks. The moves made by the team in November 2020 (see Portfolio) are important, highlighting that, whilst over the long term the team embrace the transition to a low carbon economy, over the short term their expertise should allow them to see where valuations have overshot and where investment returns can be optimised within the broader framework.
BERI’s discount now stands at 0.5%, seemingly reflecting the fact that it is now more interesting to a wider section of investors. At the same time, active management has delivered a strong performance in both absolute and relative terms. The quality of the dividend income is also more apparent – both in extent (4.2% yield currently), but also the board’s commitment to using capital to support it. In our view, BERI offers significant attractions for both long-term income and total-return investors.
|Attractive dividend yield of 4.2%, supported through capital payments
||Specialist mandate means BERI is less diversified than generalist equity income funds/trusts
|Active management has helped trust to deliver strong absolute and relative returns since evolution of strategy
||Discount could widen out again if sentiment towards mining or energy sector fades
|Broader investment exposure going forward should help improve total returns and diversify risk
||Gearing can exacerbate downside