BlackRock Energy and Resources Income 29 April 2024

BlackRock Energy and Resources Income (BERI) has a unique investment remit that sees it supplement the growth and income potential in the mining and traditional energy sectors, with the very different return profile of energy transition stocks. BERI thus offers access to a number of powerful growth drivers, including the growing demand for raw materials to facilitate the energy transition. Yet the tripartite portfolio is well diversified by sector, industry and theme, allowing the managers plenty of opportunities to add alpha by astute stock or sector selection and to reallocate positions when valuations become excessive.

The strategy has delivered attractive returns since it was adopted in June 2020 (see Performance), but had a down year in 2023 as energy transition stocks in particular struggled. Managers Tom Hull and Mark Hume have seen value emerge as a result, and have been adding back to high-quality names in this theme (see Portfolio). Over 2023 they have also added a new position in oil services companies within the traditional energy space, attracted by higher-quality balance sheets, and have added back to the mining sector in recent months too. They argue that the short-term outlook has clear headwinds, necessitating some caution, but there are strong tailwinds behind their sectors that make the mid to long-term outlook highly attractive. BERI’s shares trade on a discount of 11.5% at the time of writing.

Income is a key part of the total return for many companies in the energy and mining industries, and BERI pays a healthy dividend yield. Having managed the balance sheet conservatively, the board were able to pay a higher final dividend for 2023 than forecast and raise the dividend target for 2024 to 4.5p, implying a forward-looking yield of 3.8%.

It would probably be hard to find anyone who doesn’t believe that at least one of the energy transition, traditional fossil fuel or mining industries is going to see a period of strong demand over the coming years and decades. In our view, the energy transition will happen, although the pace is far from settled, and exposure to stocks that are directly achieving it, as well as the material producers that make it possible, is attractive from a long-term growth perspective. However, we think it is also now clear that fossil fuels will be required for years to come, and the beauty of BERI’s mandate is that Mark and Tom can invest across the various sectors in this development as valuations and sentiment over and undershoot. Energy and clean energy stocks have delivered excellent returns at times over the past five years, and then seen rapid declines. Meanwhile BERI has delivered much steadier positive returns, as we demonstrate under Portfolio.

An interesting nuance to us in the recent results was the strength of the iron ore price, despite weakness in demand from the Chinese construction industry. Mark and Tom attribute this to huge demand for renewable infrastructure taking up the slack. Meanwhile, lithium prices fell sharply, although encouraging take-up of EVs remains a key policy goal of many governments. To us, this highlights the benefits of a broad and diversified mandate and a specialist management team who can be sensible about pricing as well as investing in likely long-term winners. It’s worth noting that BERI has return drivers outside the energy transition story too, and indeed the diversity of sources of demand for commodities is one of the attractions of investing via a diversified fund, in that it helps to reduce the volatility of share prices and revenue streams. In our view BERI has a differentiated strategy exposed to some structural economic trends, which makes it appealing, especially on a double digit discount to NAV.