BlackRock Energy & Resources Income (BERI) is the new name for BlackRock Commodities Income Trust. The share price reaction to the name change (effective 14th May) disproves those who believe names carry no importance to the attractiveness of a trust. Somewhat unexpectedly, the trust de-rated by around 3 percentage points on the announcement of the change of name which puzzles us, given that nothing else has changed as regards the management of the company.
Discount to NAV
The board made the decision to adopt the new name, believing that it better reflects the company’s investment universe, which consists predominantly of energy and mining equities as opposed to commodities. As before, the managers of BERI employ a conviction-led approach to delivering a high income from the global mining and energy sectors. They have slowly been introducing an “energy transition” theme within these sectors into the portfolio (4.2% of the portfolio currently), recognising that global efforts to mitigate the effects of climate change will offer interesting growth opportunities. With the shares now yielding 5.7%, we observe that there are very few equity trusts which offer a higher dividend yield. What is more, the trust now trades on a discount of around 10% at the time of writing.
The top ten holdings currently account for just over 50% of total assets, and as such relative to most equity funds this trust can be considered highly concentrated. Managed by Olivia Markham and Tom Holl, BERI typically has a roughly even split between mining and energy stocks. Reflecting the income mandate as well as the current outlook of the managers, a significant proportion of the trust is invested in the larger, diversified companies within each sector. The managers believe that within both of these sectors, diversified mega-caps will continue to be hugely cash-generative at current commodity price levels. With solid balance sheets and management focused on shareholders, the prospects seem set fair for dividend hungry investors.
BRCI’s objectives are to achieve both an annual dividend target and, over the long term, capital growth. The board considers a “reference index”, of 50% EMIX Global Mining and 50% MSCI World Energy Index to compare performance, but does not see it as a benchmark, given the high-income mandate of the trust. Over the longer term, during what has been a severely volatile time for mining and energy companies, the trust has not kept pace with the reference index. However, 2019 has been a good year for BRCI, and as at 5th June 2019 is +8.7%, 0.4% ahead of the reference index in NAV terms. The trust’s more conservative approach is evidenced by the fact that it has beaten the average for the AIC investment trust peer group in six of the past eight calendar years.
High yields often pose questions as to their sustainability. However, in the most recent annual report, the board has reaffirmed its commitment to a 4p dividend for the financial year ending 30th November 2019. The board also stated that it will look to protect any future shortfall in earnings with revenue or capital reserves, which in our mind indicates that the dividend yield of 5.7% looks relatively secure. At this level, the trust yields considerably more than most other areas of the market, and is firmly in the top ten highest yielding equity investment trusts (across all sectors).