Mark Hume, co-manager of the BlackRock Energy and Resources Income trust, discusses his engineering background, how he balances investing in renewables and fossil fuels, and exposure to AI.
How long have you been working on the BlackRock Energy and Resources Income Trust (BERI) and what’s your background in researching/investing in mining and energy companies?
I’m a petroleum engineer by academic background and spent the early part of my career working in the oil and gas industry. I then pivoted into finance, taking roles on the sell-side covering global power and energy stocks. I transitioned to the buyside in 2010, working for an asset manager in Australia, first as a research analyst and latterly as a portfolio manager.
I then joined BlackRock’s thematics and sectors team in 2017 and became a named co-manager of the BlackRock Energy and Resources Income trust in 2020. I specialise in conventional energy and energy transition stocks, while my co-manager Tom Holl specialises in the mining sector.
How does the fund balance investing in renewables and fossil fuels? What are clients asking for?
We consider the trust’s neutral sector allocation to be 40% mining, 30% conventional energy and 30% energy transition. We try to balance making sure we’re expressing our active views on our preferred sector at any one time with ensuring we’re continuing to provide diversified exposure.
Our trust is flexible in that we are not structurally biased towards renewables over fossil fuels or vice versa. We think this, and the fact we cover both areas in equal depth, help us to be unemotionally attached, able to lean in to wherever we see the strongest near-term outlook. It also fits well with our conviction that meeting the world’s energy needs over the coming decades will require an ‘all of the above’ type energy solution.
In terms of what clients are asking for, the most significant investment theme over the past three years has been artificial intelligence (AI). While our trust doesn’t invest in technology companies, we’re starting to get more client questions on the potential for our areas to offer second and third derivatives of that theme.
So, for example, our conventional energy and energy transition companies are essential in supplying AI’s enormous power requirements, while our mining companies provide the building materials for power infrastructure and data centres.
Which areas are you allocating to currently? Where are the key opportunities to take advantage of?
Since the start of this year, we have been adding to the energy transition sector based partly on a view that the risk surrounding complete removal of US policy support was being overestimated. At the same time, companies in this space were trading, and continue to trade, at a discount relative to their history and relative to broader equity markets.
See also: Q&A with FGEN’s Mountney: ‘Energy transition requires a holistic approach’
Previously, renewables adoption was about displacing coal and while that story remains in tact, we are now also seeing growing global power demand in part driven by artificial intelligence, electrification and re-shoring. Historically, there have been periods in which the supply of renewable energy technology from China has overwhelmed the market, but with the current anti-involution measures there and rising protectionism elsewhere, we are seeing pockets of sustainable profit margins. Our thesis has so far been playing out and this has been additive to returns.
Where are the income opportunities?
In the energy transition sector, we are seeing attractive income opportunities from some of the clean utilities that have strong dividend pay out ratios and stable earnings profiles. In the conventional energy space, we have added to the integrated oil and gas companies, mainly as we see them best placed to weather our base case of subdued oil prices, but also because they are amongst the best dividend payers. In the mining space, we generate most income from the diversified mining companies, which are companies that generate revenues from producing a range of mined commodities.
What have been your best performing assets over the past year and why?
Our best performing positions over the past year have included some renewables names which have benefitted from greater clarity around US policy support. We have also seen strong performance from some storage names seen as beneficiaries of spending on artificial intelligence infrastructure. In the mining space, a number of our precious metals companies have also performed exceptionally well, on the back of a rally in gold and silver prices and easing cost inflation.
What has been the most challenging time of your career as a portfolio manager?
I’d say the most challenging times have been during unprecedented events which, due to the improbability principle, happen on a relatively regular basis. During my time as a research analyst and then portfolio manager, arguably the most notable of these have included the global financial crisis, the Covid pandemic and Russia’s invasion of Ukraine. These times of market panic have meant long hours, having to make decisions quickly and definitively and having to trust in our process.
Ultimately, these times have also been the times in which I have learnt the most.
What’s your outlook for mining and energy companies over the next five years?
We think the case for mining and energy remains compelling, given attractive valuations, the outlook for inflation, rising global demand for power, and the accelerating energy transition. We expect securing energy, and critical minerals supply to remain a key theme for governments and become a bigger theme for markets. Geopolitical risk sadly appears to have taken a structural step up, so the diversification qualities of these sectors are ever more appealing. Meanwhile, over the next five years, we see commodity supply as generally being constrained, supporting prices.
Of our three sectors, in the near-term we are most positive on the energy transition names given the supportive drivers I mentioned earlier. We’re more cautious on the conventional energy sector. While it’s the cheapest from a valuation perspective, our top-down research suggests oil supply is set to outpace demand over the next 12 months. Meanwhile, while the current weakness in China’s economy remains a headwind for the mining sector in the short-term, we see bright spots in sub-sectors like copper and precious metals, where long-term demand dynamics remain powerful.
This article first appeared on Portfolio Adviser
