Ian Cowie: high income but flat returns from battery specialist trust

Our columnist is green with envy that he could have obtained higher returns from a rival renewable energy investment trust. Here he explains why the performance of the trust he picked has been subdued. 

Please don't laugh but a tale of two apparently similar renewable energy investment trusts has left me feeling green. Just not in a good way.

Green with envy would be more like it, after the one I bought crawled just over 1% higher last year - while the other share soared by a scintillating 26%. Ouch!

Flat returns from the batteries specialist I chose are just about bearable, because this long-term investor knows from personal experience that you win some and lose some. But I must admit to being shocked by just how much the other electricity storage firm has fizzed up.

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So compare and contrast, as the exam papers used to say, my holding in Gore Street Energy Storage Fund (LSE:GSF) and Gresham House Energy Storage (LSE:GRID).

As their names suggest, both invest in industrial-scale batteries. The idea is to generate profits from smoothing out inevitable fluctuations in the price and supply of renewable power from solar panels and wind farms. Like an overcast winter’s day, when the sun don’t shine and the wind won’t blow.

There the similarity ends, at least from this shareholder’s point of view, because GRID has shot the lights out with total returns that plug it into the very top socket of the Association of Investment Companies (AIC) ‘Renewable Energy Infrastructure’ sector. Meanwhile, my GSF shares languish, unloved in its dark and dingy basement.

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To be fair to GSF, it pumps out nearly 6.4% dividend income, which may explain why the shares continue to trade more or less in line with their net asset value (NAV), despite underwhelming capital performance, as measured by independent statisticians Morningstar.

Meanwhile, GRID pays nearly 4.4% dividend income but its double-digit total return over the last 12 months has pumped up the shares to trade at a premium of 6.7% above their NAV.

Both investment trusts are due to celebrate their fifth anniversaries later this year, because GSF launched in May 2018, while GRID followed that November. Now, as both these green rivals approach the final furlong of their first five-year sweepstakes, it rather looks as if I have backed the three-legged nag.

So, in a spirit of intellectual curiosity, I asked GSF what went wrong and why we might hope for happier days ahead. Max King, the wise and well-informed former fund manager who is now one of the non-executive directors at GSF, was first to respond.

He told me: “We have a lot of projects in construction, as opposed to operational, so have not been able to take as much advantage of higher short-term prices as others.

“We have raised a lot of cash and that drags on NAV. We can now invest that cash at higher returns than were available a year ago, the availability of capital having dried up.

“We announced a significant acquisition in Texas this week and we have other projects in our pipeline at an advanced stage. So that means less NAV progression in the short term for more in the medium to longer term. That, in turn, is expected to trigger higher dividends.”

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Then GSF’s chief executive, Alex O’Cinneide, added further details: “Today, we have about 30% of GSF’s portfolio in operation and we expect that about 50% of the portfolio will be operational by end of 2023.

“Valuations are underpinned by existing operational performance, and having assets across four grids with 14 different revenue streams means our portfolio is diversified against market volatility.

“Securing higher revenues while optimising capital expenditure, driven by system duration, and constructing a robust portfolio in-house with strong technical performance and resilience are key factors supporting GSF’s NAV.”

Whaddever. Here and now this small shareholder is disappointed to learn that nearly five years after GSF launched, less than a third of the fund has been invested, with only half the money expected to be employed by the end of this year.

So, with all due respect for the technical challenges being tackled by an experienced and committed management team, one of the lessons I have learned here is to be more cautious about start-ups and the time it can take to get going. I also fear this might be another example of me aiming for too high an income and then falling short with low total returns.

On a brighter note, I remain encouraged to see the National Treasury Management Agency - Ireland’s sovereign fund - among GSF’s top 10 shareholders. When installing expensive infrastructure, it’s never a bad idea to have the government onside.

Similarly, there is some reassurance in seeing that three of GSF’s directors - including Max - have invested more than their annual fees in these shares. Unlike GRID, where none has done so, according to analysis by Investec Securities.

Coming down from the clouds, GSF shares I bought for 105p in November 2020, trade at 110p this week and have delivered a low four-figure income, tax-free into my ISA. If pessimists are right about the recession ahead, we might soon look back on such returns as being reasonable. So, all things considered, I do not intend to blow a fuse or unplug my batteries investment trust yet.

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

Ian Cowie is a shareholder in Gore Street Energy Storage (GSF) as part of a globally diversified portfolio of investment trusts and other shares.