Disclosure – Non-Independent Marketing Communication
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.
- Over the year ended 30 November 2020, BERI produced NAV total returns of 13.9% and share price returns of 16.0%. Although a formal mining and energy sector benchmark is not used by the board, to offer context the EMIX Global Mining Index rose by 19.6% and the MSCI World Energy Index fell by 32.6% over the same period.
The portfolio was realigned in June and the managers increased the portfolio’s emphasis towards energy transition stocks, with the aim that the trust will have up to 30% of NAV invested in this area. This change has already been a significant contributor to returns, as sustainability trends have continued to progress further in 2020 and 2021. This shift comes with a change to the management team, with energy specialist Mark Hume replacing Olivia Markham – who continues to work as co-manager on BlackRock World Mining Trust – in early 2020.
The income from the underlying companies in the portfolio remained relatively robust. Revenue return for the year was 4.31 pence per share (2019: 3.97 pence), boosted by a one-off corporation tax refund. The current target from the board is to pay quarterly dividends of at least 1.00 pence per share, representing a yield of 5.6% based on the share price of 71.40 pence per share as at 30 November 2020.
The huge divergence in the mining and energy indexes show that BERI’s managers have done a good job in delivering NAV returns of 13.9% for the financial year ending 30/11/2020. The investment in energy transition stocks has clearly paid off for the trust so far. Taking advantage of the opportunities thrown up by COVID-19, the new focus on ‘energy transition’ stocks is now firmly in place. This move, increasing the focus to stocks that are benefitting from the transition in the energy sector, and moving away from carbon-based energy supplies, is in our view a smart move – giving the trust exposure to a theme which has multiple drivers and a long shelf life. We view the global transition to a low-carbon economy as long-term secular trend, as governments across the world continue to announce new carbon reduction targets and technology advancements in the renewable power and electric vehicles areas. As at 31 December 2020, 24.1% of the company’s portfolio was held in energy transition stocks.
Over the shorter term the team have been quick to act on newsflow surrounding vaccines. In early November, when the first vaccine announcements were made, the managers took a more positive view on the oil price and energy companies for 2021. Taking advantage of the low valuations of many energy companies, they increased their exposure from below 20% to around 30%. This was funded through a combination of profit taking in some strongly performing sustainable energy companies, reducing gold company positions and the use of gearing. This quick thinking from the managers meant the trust was able to capture a large part of the rally that followed in energy equities.
In terms of income generation, the increased exposure to higher growth energy transition companies is expected to result in lower revenues generated by the trust. This is because typically excess cashflows are reinvested back into growing their businesses, rather than distributing them in the form of dividends. However, the flexibility that BERI has to support dividends with reserves, generate income from option writing and the general dividend paying strength of other companies within the portfolio has meant that the board anticipate continuing a dividend of at least four pence per share for the year to 30 November 2021. At the current share price this represents a yield of 4.9%, the highest in the AIC’s Commodity and Natural Resources sector.
In the period since 30 November 2020, BERI has delivered strong NAV total returns of 11.3%, in comparison to returns of 10.1% and 3.4% from the EMIX Global Mining and MSCI World/Energy sectors respectively. We expect this strong relative and absolute performance to continue throughout 2021, as we see the trust benefit from its broader investment exposure and, more specifically, the expected shift to a low carbon world. In conjunction with this, the managers have recognised that the global economy cannot continue to grow and decarbonise without new materials being mined every year. This makes mining companies a critical part of the lower carbon economy – a factor which the managers believe “is being underestimated in terms of potential commodity demand growth rates and the perception of many that mining companies have an ESG problem”. Currently mining is the largest sector position in the portfolio at 51.4% of the total NAV.
Investors have started to recognise the attractiveness of the BERI proposition, demonstrated by the narrowing of the discount in recent times. As of the 12 February 2021, BERI is trading at a discount of 2.0%, in comparison to a 12-month average of 13.3%. However, we see any discount to NAV as an attractive entry point into a trust which, as a package, looks interesting for both long-term income and total return investors.
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