Ian Cowie: short-term pain, but this long-term trend has legs

Our columnist points out that while returns have not shot the lights out over the past year, he is hopeful a greener future will turbocharge long-term returns.

Electricity generated by solar power surged 24% higher last year, according to the International Energy Agency (IEA), and will become the world’s biggest source of power by the middle of this century. Long before then, the IEA predicts demand for fossil fuels will begin to fall by the middle of this decade.

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So, whatever you think of ‘think tanks’, it makes sense to consider whether your investment portfolio adequately reflects likely changes in the way we power industry, heat our homes and make transport go. Fortunately, investment trusts make it convenient and cost-effective to gain exposure to a variety of possible energy outcomes.

Better still, shares in the Association of Investment Companies (AIC) ‘Renewable Energy Infrastructure’ sector currently yield an average dividend income of 5.86% and trade at an average discount of 7% below net asset value (NAV).

Both numbers reflect the fact that initial enthusiasm about solar and wind-generated electricity, which soared immediately after Russia invaded Ukraine, disrupting oil and gas supplies, has waned. Doubts also cloud the future of hydrogen and nuclear power.

But the IEA argues that the long-term trend remains clear - and it should know what it is talking about, because its 31 member countries consume 75% of global energy. Faith Birol, an executive director of the IEA, pointed out: “Russia’s efforts to gain political and economic advantage by pushing energy prices higher have spurred a major response by governments, not just in the EU but in many countries around the world, to speed up the deployment of cleaner and more secure alternatives.”

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Coming down from the clouds of geopolitics and macro-economic generalities, the top-performing investment trust in the renewable energy sector over the last five years is Greencoat UK Wind (LSE:UKW). This self-descriptive fund generated total returns of 68%, including dividend income of 5.6%, according to independent statisticians Morningstar. It is also top of its sector over the last 10 years, with a total return of 149% but it continues to trade at a 6% discount to NAV.

Bluefield Solar Income Fund (LSE:BSIF) ranks second over five years with a total return of 60%, a dividend yield of 6.2% and trades at a 5% discount to NAV. BSIF is another UK-focused fund but lacks a 10-year record.

JLEN Environmental Assets (LSE:JLEN) ranks third over five years with a total return of 56%, a dividend yield of just over 6% and is priced 4.2% below NAV. JLEN, which also lacks a 10-year record, is more diversified than the wind and solar funds mentioned earlier because - in addition to those sources of power - it includes waste and bioenergy, anaerobic digestion and hydro power.

Investors who hate to follow bandwagons may draw perverse encouragement from the fact that, since falling from financial fashion, renewable energy investment trusts delivered negligible average returns of less than 1% over the last year. Meanwhile, UKW, BSIF and JLEN generated one-year returns of 5.2%, 8.9% and 12.7% respectively.

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Sad to say, both my shares in this AIC sector remain under a cloud where the sun don’t shine and the wind won’t blow. No wonder this small shareholder is going green - and not in a good way.

Gore Street Energy Storage Fund (LSE:GSF), the industrial-scale batteries specialist that aims to arbitrage short-term imbalances in supply and demand, has shrunk by 6% over the last year, while yielding 6.9% dividend income. Sterling-denominated shares in US Solar Fund (LSE:USF)  have fallen by 6.7%, while yielding very nearly 7% dividend income. Neither has a five or 10-year track record and their discounts to NAV are 10% and 16% respectively.

Fortunately, the AIC ‘Renewable Energy’ sector is not the only place to find investment trusts with exposure to the global transition to ‘net zero’ carbon emissions. Ecofin Global Utilities & Infrastructure (LSE:EGL) sits in the AIC’s ‘Infrastructure Securities’ sector because its underlying investments include conventional power companies, as well as purely renewable energy businesses.

I paid 152p per EGL share in September 2019, and they cost 220p this week, making it my ninth-most valuable holding. EGL trades at a negligible 0.24% discount to NAV, yields 3.6% dividend income and generated total returns of 125% over the last five years.

Unfortunately, EGL delivered distinctly underwhelming total returns of less than 1% over the last year. Depending on your point of view, my mixed bag of renewable returns either demonstrates the dangers of disappointment in this sector or suggests there might still be time to climb onboard before the wind really starts to blow and solar heads for the sky. To be candid, I have no idea which it will be but I sincerely hope the IEA is right.

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

Ian Cowie is a shareholder in Ecofin Global Utilities and Infrastructure (EGL), Gore Street Energy Storage (GSF) and US Solar Fund (USFP) as part of a globally diversified portfolio of investment trusts and other shares.