Ian Cowie: hanging on in hope more than expectation

Our columnist explains why this investment trust has disappointed since he bought it for his ‘forever fund’ a couple of years ago.

Investors should always be wary of any delay in corporate announcements because, as City cynics say, bad numbers take longer to add up. So it has proved at the self-descriptive investment trust US Solar Fund (LSE:USF), where a surprise was followed by a postponement and then a shocking disappointment.

Apart from entertaining those of you who enjoy a good laugh at Cowie’s Clangers - shares whose price fell by 10% or more after I bought them - this tale may prove instructive because it shows how even businesses that once seemed set fair for a bright future can languish under a cloud. Bear in mind that the American government is committed to spend $369 billion (£294 billion) on renewable energy over the next decade, as part of its Inflation Reduction Act (IRA), and USF’s failure is all the more remarkable.

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Long before Congress approved the IRA last year, I invested 2% of my life savings in the sterling shares of USF (USFP) at 79p each in November 2020, because I believed this was a way to gain a stake in the future. Hoping to play a small part in the transition to cleaner, greener energy, I popped these shares in my ISA for tax-free dividend income while waiting for fossil fuels’ clouds to clear.

Sad to say, USFP shares fetch just 59p today but continue to yield over 7.5% income. More positively, one man’s misfortune might prove another’s opportunity because these shares are trading at a 22% discount to their net asset value (NAV), according to independent statisticians Morningstar.

Better still, optimists argue that the true discount and NAV are both bigger than those numbers suggest. Well, they do say that hope springs eternal.

Here and now, how did it all go wrong? Things began to unravel last October when USF announced that it intended to sell some or all of its assets, which came as an unpleasant surprise after its relatively recent launch in April 2019.

Matters were complicated by the departure of its fund managers, but USF said it was “undertaking a strategic review of the options available to the company to maximise value for shareholders, primarily due to structural challenges in the US solar sector alongside a sustained discount in its share price relative to its underlying net asset value.”

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Hopes of an announcement last year faded away before guidance that a buyer could be named in February this year also failed to become a fact. Then, as if to prove that patience is not always rewarded, USF updated shareholders earlier this month to reveal…not much at all.

More formally, USF said: “The company recently received a possible all share offer which was at a significant discount to the latest reported NAV.

“Having carefully reviewed the offer, together with its financial advisors, and having consulted with certain of its major shareholders, the board has unanimously rejected the offer.

“The company is no longer in receipt of any possible offers and the board has accordingly decided to terminate the formal sale process.”

After such a long roll of the drums, this was a truly bathetic announcement. Shareholders must now decide whether to exit at a fire sale valuation or continue hoping that something will turn up.

For example, recovery might begin with a $53.2m cash payment for a 50% share in one of USF’s solar farms that, if received, would equal about 17% of this fund’s NAV. MN8 Energy, formerly known as Goldman Sachs Renewable Energy, entered into a binding agreement last month to make this payment and has paid a $1 million non-refundable option fee.

If nothing else, the deal suggests that Goldman still believes there is money to be made out of the transition to renewable energy, even if the sun has failed to shine on all participants in this sector so far. On a brighter note, USF issued a regulatory news service (RNS) statement, saying it “expects the transaction to close in the second quarter (Q2) of 2023 subject to customary regulatory and financier consents.”

With just over six weeks left of the second quarter, I intend to hang on in hope more than expectation. A recent dividend payment helps, although it pales into insignificance compared to the £63,000 that USF paid its Chair last year or the £52,500 its Chair of Audit received or the £42,000 each both the other USF directors got, according to its annual report. Let’s hope they don’t disappoint again.

Ian Cowie is a shareholder in US Solar Fund (USFP) as part of a globally-diversified portfolio of investment trusts and other shares.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.