Ian Cowie: the investment trust I have bought with a 6.7% yield

Our columnist was happy to pay a pricey premium for the top-performing trust in its sector over the past year.

Going ‘green’ with our investments need not mean giving up growth or income now in the hope of jam tomorrow. My new renewable energy investment trust yields an eye-stretching 6.7% and is the top performer in its sector over the last year with a total return of 16%, according to independent statisticians Morningstar.

Gore Street Energy Storage (LSE:GSF) aims to smooth out inevitable peaks and troughs of electricity production from wind and solar power by means of massive batteries. That way, green juice is available when the breeze isn’t blowing and the sun ain’t shining - or when we are most likely to need it to heat our homes.

With my first quarterly dividend due next week (15 January), since I invested at 105p last November, it won’t take long to find out if the practice matches the theory. More seriously, it will take a while for this investor to get back to evens because I had to pay a 12% premium to net asset value (NAV) to obtain such a high running yield.

However, I am happy to do so because I believe renewable energy will be one of the big themes of this year and the decades ahead. The US president-elect Joe Biden has promised $2 trillion (£1.4 trillion) to stimulate renewable energy, British prime minister Boris Johnson enthuses about a “green revolution” and a United Nations conference to discuss the Paris Accord on climate change will take place in Glasgow next November. Even China is trying to clean up its act.

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So, after allowing for politicians’ hyperbole, investors who believe it can pay to follow the money should consider going green. Renewable energy has certainly become a bigger part of this small shareholder’s portfolio over the last year.

In addition to ITM Power (LSE:ITM), a Sheffield-based maker of ‘green hydrogen’, and Orsted, the Danish firm that is the biggest offshore wind farm operator in the world; I also hold shares in Ecofin Global Utilities & Infrastructure (LSE:EGL) and US Solar Fund (LSE:USF), the self-descriptive investment trusts.

It is early days but EGL, in which I originally invested at 152p in September 2019, was the first of these investment trusts to go into my forever fund and now trades at 196p, yielding 3.5%. I didn’t initiate USF until last November and there has been no significant change since then, while ITM and Orsted - not strictly the subject of an article about investment trusts - have shot the lights out.

A glance at the Association of Investment Companies’ (AIC) Renewable Energy Infrastructure sector is enough to show that I am not the only investor who is interested. These 16 trusts trade at an average premium of 14.5% above their NAV, despite having delivered a negative average ‘total return’ of 3.1% over the last year. More positively, they are an average of 59% up over the last five years.

Returning to GSF, I was impressed to see that all four of its directors hold shares in this trust that are worth more than the annual fees they receive from it.

I asked GSF’s fund manager Alex O’Cinneide why anyone might consider buying these shares. He told me: “As the renewable energy market in the UK continues to grow, the need to balance the grid through energy storage assets increases, providing a platform for growth.

“GSF pays a 7p dividend to investors, a highly attractive yield, and there were no interruptions to dividends from Covid-19. Compared with other renewable technologies, the fund has no power-price risk, no legislation risk, multiple revenue streams and outstanding counterparties in the National Grid and EirGrid (the state-owned electricity grid operator in Eire).”

On that front, it is also interesting to note that Eire’s National Treasury Management Agency (NTMA) is the biggest shareholder, with a near 14% stake in GSF. O’Cinneide told me: “This is a significant endorsement from a leading renewables investor who identified the importance of energy storage and Gore Street’s capabilities.

“In addition, there remains a further capital commitment that the NTMA can also deploy into the fund for use on assets on the island of Ireland. Partner investors also include Nippon Oil, the Japanese oil major.”

Against all that, independent statisticians Morningstar via the Association of Investment Companies (AIC) assess GSF’s annual costs at an apparently shocking 3.47%, but O’Cinneide claims this is “incorrect” and the correct figure is 2.31%. That still ain’t cheap but might be excused by the fact this fund has total assets of only £72 million. 

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For comparison, Gresham House Energy Storage (LSE:GRID) has total assets of £345 million and ongoing charges of 2.15%. GRID yields 6.1%, but trades on a 15% premium to NAV after delivering total returns of 11% last year.

Both GRID and GSF show that, while batteries might sound boring, they can generate eye-stretching income with double-digit returns. Shares in either might be just the thing to galvanise a green portfolio.

Ian Cowie holds shares in Ecofin Global Utilities & Infrastructure (EGL), Gore Street Energy Storage (GSF), ITM Power (ITM), Orsted (ORHE) and US Solar Fund (USFP) as part of a globally diversified portfolio of investment trusts.

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

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