BlackRock Energy and Resources Income Trust (BERI) saw a shift in emphasis in its mandate over a year ago, explicitly positioning the trust towards the decarbonisation of the global economy. In our view, this is one of the biggest changes we will see over our lifetimes, and as an investment theme is set to run for decades. As such, from being a relatively niche trust, BERI is now relevant to a significantly wider audience of investors.
At the same time BERI is not trying to be an explicitly ‘green’ trust: allocations between mining, traditional energy and energy transition stocks are expected to be dynamic. The past year has illustrated what this means in practice, with the team significantly increasing traditional energy exposure in November 2020, and continuing to add since. As we discuss in the Performance section, energy stocks have contributed very strongly to the performance of the trust since then.
The scale of the energy transition opportunity means that BERI now has potential exposure to a wider range of sub-sectors and niches than it previously had (see the Portfolio section). All other things being equal, this should potentially allow the NAV to have a less volatile trajectory than it has had in the past.
Income continues to be a key part of what BERI seeks to offer investors, and the shares yield 4.1% on a historic basis. The board has stated that they are happy to use revenue and capital reserves to support the dividend, but the recent interims showed that the dividend for the first six months of the financial year is covered once again.
Due to the shift of emphasis in the mandate, in our view BERI feels much more relevant to today’s investor. In fact, until the summer of this year, the discount had been on a tightening trend. The current discount of 5%, whilst narrower than when the board last bought back shares (c. 10%), could offer an interesting entry point for long term investors.
The past few months have served as a timely reminder that having pragmatic managers with a reasonably broad mandate is an advantage for investors wanting exposure to the decarbonisation theme. The S&P Global Clean Energy index was very strong in H2 2020 and the first months of 2021, but then suffered a significant correction. In aggregate over the period, BERI has delivered performance broadly in line with the clean energy index with considerably less volatility, and well ahead of the mining and traditional energy indices, not to mention the MSCI ACWI. In our view, this can be considered an excellent performance over what has been a relatively volatile period for these sub-sectors.
The dividend yield of 4.1% is attractive, supported with revenue and capital reserves. With a mandate including more growth opportunities, the managers have a better chance of achieving their long-term income and growth objectives. The managers’ specialist areas of focus put them in a good position to be able to add value for investors, with a tailwind from a theme that is set to run for decades.
|Attractive dividend yield of 4.1%, supported through significant distributable reserves
||Specialist mandate means BERI is less diversified than generalist equity income funds/trusts
|Active management has helped trust to deliver strong absolute and relative total returns since evolution of strategy
||Discount could widen out further if sentiment towards mining or energy sector fades
|Discount has widened, offering a potentially attractive entry point
||Gearing can exacerbate downside