A tricky first half of the year has upended returns at BlackRock Energy & Resources Income (BERI ) with net asset value dropping 13.8% in the six months to 31 May.

A mild European winter that subdued demand for gas, China’s underwhelming reopening from pandemic restrictions, a broad market rotation back towards growth stocks as well as soaring costs in an inflationary environment proved difficult for the £162m portfolio which has successfully played both sides of the energy transition while having big exposure to metals miners. 

After a positive start to the half-year, recently published half-year results show the shares derated and fell from a premium above NAV to a discount, leaving them down 15.9% over the period. That was inbetween the falls of 14.9% and 16.3% in the EMIX Global Mining and MSCI World Energy indices BERI uses to measure its performance.

Despite this setback, shareholders have done well since 2020 when the trust replaced its previous 50-50 split between mining and energy companies with a 40-30-30 allocation between mining, traditional energy and energy transition stocks. Over three years to yesterday’s close, shareholders have received a total return of 101.6% that beats the 39.9% of the EMIX mining index but below the 135.4% from the World Energy benchmark.

Fund managers Mark Hume (pictured) and Tom Holl struck a cautious tone given sticky inflation, the extremely narrow rally among US mega-cap stocks, ‘which more often than not portends trickier times ahead’, and China’s weak recovery. In response they have cut gearing, or borrowing, from 13.7% to 5.5%.

They highlighted the risks of rapid ‘quantitative tightening’, in which central banks like the Federal Reserve undo the massive monetary stimulus unleashed after the 2008 financial crisis and the 2020 pandemic, with the collapse of several US regional banks a direct result.

‘Whilst we see an increasingly supportive policy backdrop for the energy transition over the next two decades, we consider that near-term caution is warranted, and the company is positioned accordingly,’ they said.

‘On the positive side, there is scope for China to lean on stimulus measures to support its real estate sector, which would bode well for mined commodity and materials demand. This would be additive to mobility trends which continue to grind upwards as more people choose to travel post-Covid-19 restriction easing.

‘On the negative side, higher-for-longer interest rates may well be required to properly blunt western economies that continue to “run hot”,’ they added.

On the energy transition side of the portfolio, falling valuation multiples presented the pair with the opportunity to add to their exposure, which totalled 27.8% at period end. They are poised to add further new positions as they believe the impact of rising interest rates is not yet fully reflected in share prices.

In turn, they reduced the traditional energy exposure, which provides base load power for the energy transition, to 32.6%, but reintroduced US energy company ExxonMobil, which had fallen to an attractive valuation. Mining was reduced to 39.6%.

Stifel analyst Iain Scouller said it had been a tough six months following the strong performance of recent years but said the shares were now inexpensive.

‘The shares are trading on a 10% discount, which offers reasonable value and compares with a one year range of a 4% premium to a 12% discount. The dividend yield of 3.7% is also attractive,’ he said.

Choppy five-year returns 

Source: Morningstar