BlackRock Energy and Resources Income

The shift towards the energy transition is seemingly already having a positive impact on BERI’s returns…

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This is a non-independent marketing communication commissioned by BlackRock Energy and Resources Income. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

BlackRock Energy and Resources Income

BlackRock Energy and Resources Income Trust (BERI) seems to be experiencing something of a resurgence in performance terms, having shifted its focus by adding ‘energy transition’ stocks to the existing mining and traditional energy exposure, as well as by appointing Mark Hume as co-manager.

The trust aims to provide high income and capital growth, and currently offers a yield of 6% based on the board’s dividend target, which is supported by reserves or capital.

BERI’s managers believe that the energy transition to a more sustainable global economy is likely to evolve over many years, and that it will present interesting investment opportunities during that time. Since June, the exposure to these stocks has been ramping up and now stands at 31.8%. If one were to count mining exposure to other metals which will be required in vast quantities for the energy transition (such as copper), the trust’s exposure to this theme is estimated to be c. 50%.

Within the new thematic exposure, the managers have identified electrification, energy efficiency, clean power, clean transportation and energy storage as key multi-year sub-themes where they expect to have exposure. All of these seem likely to benefit from calls to “build back better” using government stimulus plans, as well as from longer-term support.

The new investments have had the effect of broadening and future-proofing the exposure of the trust. The effect has already started to show itself in the performance numbers. A strong relative performance since June has helped BERI recover all of the lost ground year to date in absolute terms.

Kepler View

BERI has historically struggled relative to the reference index. However, the move to broaden the investment mandate and the appointment of an energy specialist (in the form of Mark Hume) look to have already had an impact. Performance since June relative to the historical reference index has been impressive, and perhaps represents the first green shoots of a recovery in the fortunes of BERI.

The underlying drivers of the energy transition theme are multiple, which means that in our view they are unlikely to be blown off course. Certainly the investment opportunities are out there, and so it is encouraging that BERI’s specialist team are focussing on them. Aside from potentially boosting returns, the pattern of returns should also make the trust more attractive, given stocks exposed to the energy transition are more broadly dispersed by sector. As we illustrate in the Portfolio section, the exposure to utilities, industrials and technology has already increased markedly.

BERI’s discount still lags at c. 13%, and offers an attractive dividend yield of 6%. The tilt towards structural growth is expected to come at the expense of income in the short run, but shareholders will be reassured that the board is looking to use reserves to support the dividend as BERI makes its own transition. As a package, in our view the trust looks attractive for both long-term income and total return investors.

BULL BEAR
Yield premium to market (historical yield of 6%), with dividend supported through capital payments
Specialist mandate means BERI is less diversified than generalist equity income funds/trusts
Discount of c. 13% looks anomalous, based on yield and changes made to mandate
Dividends paid from capital can erode trust’s capital base, which is already on the small side
Broader investment exposure going forward, should help improve total returns
Gearing can exacerbate downside
William Heathcoat Amory
William Heathcoat Amory is a co-founding partner of Kepler Partners LLP and leads the Kepler investment trust research team. William has 18 years of experience as an investment company analyst. Prior to co-founding Kepler Partners in 2008, he was part of the Extel number 1 rated research team at JPMorgan Cazenove.

Fund History

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