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Investment Trusts Paved the Way on Energy

Whether you're interested in traditional energy of alternative energy, closed-end funds can be a beneficial way of investing in the natural resources sector

Jackie Beard, FCSI 24 August, 2012 | 2:28PM

 

The New City Energy Trust (NCE) reached its third birthday on February 11. Its aim is to generate both growth and income for shareholders, by investing in companies involved in the exploration and production of oil and gas. That’s a far leap away from alternative energy peers, who 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 £1.3 billion in assets. However, the Commodities and Natural Resources sector is still leaps and bounds ahead, with £2.6 billion in assets. That said, BlackRock World Mining (BRWM) accounts for nearly £1.7 billion on its own. But that still puts the traditional energy sector some £300 million ahead of its newer alternative counterpart.

The closed structure means funds don't have to deal with waves of hot money flooding in, nor a wash of investors panic-selling as markets head south.

 

New City Investment Managers are energy specialists and, like BlackRock, they don’t pigeon-hole themselves as 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 (GCL), 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 £111 million.

 

New City Energy launched just as global markets were starting to run out of steam. In spite of the ensuing downturn, the trust issued more shares in May 2008 as 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%. Since then, the fund has gone from strength to strength and the discount to NAV has come to a much more respectable level of around 5%.

 

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%. While it has recovered considerably since then, it still trades at a discount of nearer 9%.

 

Both funds prove there are definite gains to be made through investing in energy, whether through traditional energy names that are involved in the drilling of oil wells, or those that are producing nuclear power. Both use cutting-edge technology to extract and refine their sources of energy.

 

The benefit of the closed-end structure of these funds is that investors have seen an uplift in share price as well as a narrowing of the discount to NAV. In other words, the NAV has increased too so it’s been a two-fold increase. The closed structure means the funds haven’t had to deal with waves of hot money flooding in, nor a wash of investors panic-selling their assets as markets headed south at the end of 2008.

 

Just as the traditional sources of energy paved the way for exploration into the use of uranium and other renewable energy sources, so closed-end funds paved the way for their open-end counterparts. Let’s not brush aside the role they have played in developing their respective industries.

 

This article first appeared in FTAdviser.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article
Security NamePriceChange (%)Morningstar
Rating
BlackRock World Mining Trust plc360.00 GBX-0.03
Geiger Counter21.38 GBX-0.58
New City Energy Limited26.88 GBP-0.46
About Author Jackie Beard, FCSI

Jackie Beard, FCSI  is director of closed-end fund research with Morningstar UK.