Portfolio update: BlackRock Energy and Resources Income

• BlackRock Energy and Resources Income (BERI) offers a portfolio diversified across three areas supported by strong long-term trends: the mining sector, the traditional energy sector, and energy transition-related companies.
• The trust has outperformed each of the underlying markets since the new strategy was adopted in June 2020.
• All three areas are subject to short-term volatility, which can provide valuation opportunities. Managers Mark Hume and Tom Holl have been adding to undervalued energy transition companies in recent months and have taken advantage of volatility after Trump’s election win to add more. However, the portfolio remains well-diversified and close to its neutral allocation between the three sectors. Mark and Tom argue that the market might misread how radical the change is between the Biden and Trump administrations, providing opportunities to stock-pickers.
• They have taken gearing down a touch to 7.4% on a net basis, as of the end of October. This reflects caution about the tail risks in the market, although notably, the trust remains net geared.
• The outlines of Trump’s tariff policy so far remain indistinct, which means there is uncertainty about the mid-term outlook for many sectors.
• The managers have added to their oil and gas exploration and production holdings, which they think are likely to prosper under Trump. As well as cheap energy transition stocks, they also like the prospects for gold miners and uranium producers.
• BERI pays a quarterly dividend. For 2024, three of 1.125p have already been paid, which would annualise to a yield of 3.8% on the current share price.
• BERI’s shares trade on a 10% discount at the time of writing, with the board actively buying back shares.

Performance

BERI has delivered strong returns over the past 12 months as markets have rebounded. Most impressively, it has beaten all three of its underlying markets, illustrating not only the benefits of diversifying but also good stock-picking. As the chart below shows, the S&P Global Clean Energy Index has been most troubled over the period and sold off after the election of Trump. The MSCI ACWI Metals and Mining Index has been strongest through the year, but also sold off in recent weeks, perhaps due to concerns around the Chinese economy. BERI is up 13.4% in NAV total return terms at the time of writing.

In fact, BERI’s diversified strategy has worked extremely well since it was implemented in 2020, delivering strong returns while the underlying sectors have been very volatile. NAV total returns have been 147%, better than returns to the MSCI World Energy Index (128.7%), MSCI ACWI Metals and Mining Index (68.1%), and S&P Global Clean Energy Index (5%), which we have used as proxies for the underlying markets. Energy transition stocks have been the weakest performers, and this was reflected in BERI’s weighting, with Tom and Mark shifting the portfolio below the neutral weight of 30% in late 2020 and building back the position since early 2023. An increase in the traditional energy sector in late 2021 and early 2022 was helpful to the trust’s returns as oil and gas stocks did well in the aftermath of the Russian invasion of Ukraine.

For completeness’ sake, we include below a chart of five-year returns. The trust has delivered outstanding returns over this period too, ahead of each of the underlying sectors, although this period includes some months under the previous strategy.

Positioning and outlook

Mark and Tom have moved the portfolio fairly close to a neutral sector allocation in recent months, reflecting the fact they see potential in all their sectors, and also uncertainty, stemming mainly from a new US administration. They have also maintained a geared position, although taken their gearing down a little. While they acknowledge there are tail risks to be concerned about, and there are lots of uncertainties surrounding the policy impact of Trump in his second term, they think there is a chance investors overreact to his election, which could bring opportunity. In particular, they argue that jettisoning the energy transition stocks would be a mistake. They note that the sector was the best-performing of their three during the period of the first Trump presidency, while we note the US installed more solar panels and more wind turbines under Trump than under Biden. Biden also issued more drilling permits than Trump did in his first term. All this is perhaps evidence that US politicians are often not as far apart as their rhetoric suggests. While Trump has said he will seek to claw back unspent funds under the Inflation Reduction Act (IRA), we think he may well decide to keep the tax breaks under the act. Mark and Tom point out that lots of the investment under the act has been in red states and supports jobs. Indeed, Trump’s prospective Trade Secretary Robert Lighthizer has suggested that some of the measures that support US jobs could be kept. In other words, while the IRA may be walked back, it is likely that not all of its provisions will be discarded. Mark and Tom continue to find opportunities in cheap energy transition stocks which they think will do well over the long term as the energy transition continues—even if at a slower pace.

They do, however, expect there to be more stimulatory measures for traditional energy. In particular, they are bullish on the E&P stocks, which they think will benefit from a more favourable regulatory environment. Companies in this space have shown strong capital discipline in recent years and have seen this impact their shares positively, and so the managers expect this to continue. They have also added to services and distribution businesses since summer 2023.

In the mining sector, they are cautious about the short-term outlook for copper given the weakness in the Chinese economy. However, over the long run, they think it is a highly attractive asset. They note that there is very limited supply growth for copper, which should mean that when the time is right, the producers should deliver strong returns. However, with the outlook for the Chinese economy currently weak, they prefer to wait for a better entry point. They note that Chinese stimulus is more focussed on the stock market and the financial system and has not been targeted at the commodity-intensive sectors. As a result, the pure-play copper exposure has come down a bit over the past 12 months, although they still have exposure through the diversified miners. Here they see more value. The same concerns about China weigh on the shares, but at such low EV/EBITDA multiples, the managers are happy to have a significant weight in them. They have added to gold miners over the past year. The gold price has been very strong and hit new highs repeatedly over 2024. While the miners have lagged the metal price in recent years, over 2024 they rallied. Miners have benefitted from falling inflation reducing their costs, although the managers note that recent results from the largest companies in the industry were disappointing as they struggle to translate a better operating environment into free cash flow. Finally, it is worth noting the small uranium exposure in the mining allocation. Mark and Tom argue that nuclear power is increasingly being seen as a useful way to help lower carbon emissions and contribute to energy security. They note that tech giants Amazon and Microsoft have invested in developing their own nuclear power sites, recognising the huge amount of power needed for AI tools. In their view, uranium producers could do well as the world comes to accept nuclear is a part of the solution.

Kepler View

We think there are lots of reasons to be bullish about commodities in the long term. The energy transition and artificial intelligence will both be incredibly commodity-intensive, while AI will also require massive investment in power generation and transmission infrastructure. This should boost the mining sector but also potentially both traditional and renewable energy sources to meet power demand—and indeed nuclear, which sits outside both buckets. BERI offers exposure to all these strands.

The strategy has shown through its strong returns so far, that it is a powerful way to generate returns from some secular trends while reducing the volatility in the underlying sectors. We think the managers have used their freedom to shift between the sectors well and demonstrated the attractions of investing in these complicated sectors alongside a specialist team. Each of the underlying markets is volatile, as has been demonstrated over the past five years and can be easily read from the charts above. But each also seems to have a strong multi-year outlook. In our view, traditional energy will be an essential part of the mix for many years, while whatever the Trump administration does, spending on the energy transition by governments and industry around the world should grow over the coming years. BERI puts a specialist management team in charge of judging when the tapering of oil and gas will come and when investments should be wound down.

In the short term, there is a lot of uncertainty centring around two issues: first, the policies of the incoming Trump administration, on renewables and competing energy sources and on tariffs. Secondly, the strength of the Chinese economy and in particular its commodity-intensive sectors is wavering. Tariffs are another potential challenge for China. While tariffs would undoubtedly be negative for China, and while Trump will almost certainly be less favourable to renewables than a Democrat, we don’t think the short-term outlook is unambiguously negative. China may respond to tariffs by aiming to stimulate its domestic economy, for example, while there may also be positives for companies in the renewable or commodity space listed outside the US if trade policy only clamps down on direct US-China transactions. In our view, Trump wants the US economy and the US stock market to do well under his presidency, and we should be wary of assuming any extreme and damaging policies will be unveiled.

In the meantime, BERI’s shares are available on a 10% discount to NAV, which could be another source of return if or when sentiment improves. And, of course, Tom and Mark can tilt the portfolio between sectors depending on what policies eventually emerge. Shareholders benefit from a boosted yield of approximately 3.8% due to the shares being at a discount at the time of writing.

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