How to pick a renewable energy fund
Renewable energy funds and investment trusts have rapidly gained in popularity in the last few years as investors look to do good with their money while also making a return on their investment.
But it’s important to note that for all the talk about the growth in renewable energy and the ‘opportunities’ available in the sector, the share price returns from trusts and funds with generating assets in areas like wind and solar haven’t exactly been stellar.
While they could very well generate capital growth in future, investors looking at this sector should see these trusts as reliable income payers with stable dividends rather than investments that will meaningfully grow your money.
SOLID NOT SPECTACULAR
For example, popular FTSE 250 trusts like Foresight Solar (FSFL) and Greencoat UK Wind (UKW) are good dividend payers, with yields of 4.5% and 5% respectively, but their three-year annualised share price returns of 6.2% and 6.8% can be categorised as ‘solid’ rather than spectacular.
When picking a renewable trust, one important aspect to consider is power prices. All the UK-listed renewable energy trusts have a substantial part of their revenues backed by subsidies and long-term agreements to sell the electricity they generate at a fixed price. However, they also have a smaller but not insignificant exposure to the wholesale market price for electricity.
As an example of how this can affect the renewable trusts, in its 2019 results The Renewables Infrastructure Group (TRIG) wrote down its net asset value (NAV) by £101.3 million, as a result of lower near-term gas prices and an acceleration of new renewable energy projects being built.
Gas prices are used to determine wholesale electricity prices because gas-fired power stations are often what’s called the ‘marginal source of generation’.
Analysts at JP Morgan caused a stir last year when they downgraded the renewable trust sector on the basis that the growth in renewable energy will put downward pressure on power prices and ultimately mean trusts in the sector ‘cannibalise’ themselves and become victims of their own success as the more supply they add to the grid means the less money they will get for the power that they generate.
But the managers of Octopus Renewables Infrastructure Trust (ORIT) unsurprisingly see it differently, pointing out that supply and demand factors will naturally prevent this happening. After all, as the managers of many of these trusts have argued, developers clearly won’t build assets if they’re not going to be economically viable.
Like most renewable energy trusts, the ORIT managers are keen to highlight that 90% of their revenues are fixed through subsidies and power purchase agreements, but investment director David Bird thinks it’s ‘not impossible’ for power prices to actually go higher.
He says: ‘It’s certainly not our central forecast, but if electricity becomes the fuel for our transport and we see more industrial demand, all these things will increase power demand.’
‘INVESTMENT TRUST IN NAME ONLY’
James Smith, co-manager of Premier Miton Global Renewables (PMGR), believes it’s important for investors to view the majority of renewable trusts which generate electricity as developers and asset owners, rather than investment companies.
He says: ‘They’re investment trusts in name only.’
Smith is nonetheless optimistic on these trusts with power prices having now stabilised after falling heavily during the first lockdown, something which is still yet to be reflected in the trusts’ net asset values, with the current rising oil price and carbon price factors which could push electricity prices higher in the short-term.
INFLATION A POTENTIAL TAILWIND
Given their status as bond proxies, he also thinks a higher inflationary environment in 2021 could be a tailwind, and for investors looking to get exposure to the sector he suggests the following: ‘Buy a selection of them – a UK one, a broad one with a diversified portfolio, one or two more specific ones like wind or solar, and perhaps throw in a utility like SSE (SSE) which has a lot of renewables generation. That way you’ll get good exposure.’
TWO TRUSTS TO BUY
PREMIER MITON GLOBAL RENEWABLES TRUST
On the face of it, Premier Miton Global Renewables has had stellar performance over one year having returned 78%. This is down to a bounce-back from the Covid-based sell-off more than anything else, but the trust is still good a option for someone wanting to capture growth in the sector.
Investing in energy funds and companies rather than physical assets, it offers a 5.7% dividend yield, and has outperformed most renewables trusts with a three-year annualised return of 17.3%. It has a reasonable annual charge of 0.75% a year.
GORE STREET ENERGY STORAGE (GSF) 106p
One area where there could be meaningful growth is energy storage, as the potentially exponential growth in renewable energy inevitably leads to significantly more volatility in the power supply when the sun doesn’t shine or the wind doesn’t blow, increasing the need for infrastructure to store excess energy until its needed.
A good option in this space it Gore Street Energy Storage (GSF), which offers a 6.7% dividend yield and has shown good potential for growth having added 4.5% to its NAV in the last quarter of 2020.
There could also be further upside to comes with analysts highlighting that Gore has also won three contracts yet to be reflected in its NAV, while also not included in the NAV is news that its Porterstown project in Ireland has secured grid connection rights to treble capacity.