Closed-end view: Trusts paving the way on energy
Morningstar director of closed-end research tips opportunities among energy investment trusts.
On February 11 the New City Energy trust reached its third birthday.
Its aim is to generate both growth and income for shareholders, through companies involved in the exploration and production of oil and gas. That’s a far leap away from alternative energy peers, which stole the limelight right up until 2007.
Alternative energy conjures up a racier image, of cutting edge technology and new discoveries. The AIC Environmental sector now comprises eight funds, with approximately £1.3bn gross of assets. However, the Commodities and Natural Resources sector is still leaps and bounds ahead, at £2.6bn in gross assets. That said, BlackRock World Mining accounts for nearly £1.7bn on its own. But that still puts the traditional energy sector some £300m ahead of its newer alternative counterpart.
New City Investment Managers are energy specialists and, like BlackRock, they don’t pigeon-hole themselves as being only traditional or only alternative specialists. Rather, their funds cover both ends of the spectrum. As well as New City Energy, they also run the Geiger Counter Fund, whose primary focus is the exploration, development and production of energy using uranium. That fund launched in July 2006 and is almost double the size of New City Energy, at £111m.
New City Energy launched as global markets were starting to run out of steam. In spite of the ensuing downturn, the trust issued more shares in May 2008, since its shares had been trading at a premium to the net asset value (NAV) of its investments. That premium was wiped out in August as markets started to head south. The discount to NAV at which the shares traded reached its peak in December 2008, at more than 43 per cent. Since then, the fund has gone from strength to strength and the discount to NAV has come in to a much more respectable level of around 5 per cent.
Investors in Geiger Counter have had a slightly different experience. The fund kept its premium to NAV for much longer—other than a few wobbles, it stayed at a premium until October 2008, when markets then collapsed. Like its sister fund, though, its worst month was December 2008, when it reached a discount to NAV exceeding 41 per cent. While it has recovered considerably since then, it still trades at a discount of nearer 9 per cent.
Both funds prove there are definite gains to be made through investing in energy. It can be the traditional energy names that are involved in the drilling of oil wells, or those who are producing nuclear power. Both use cutting-edge technology to extract and refine their source of energy.