Ian Cowie: three investment trusts to play this long-term trend

A deal this week from Shell to buy Europe’s biggest biogas producer is the latest sign this big trend has plenty of legs. Our columnist runs through the exposure he has to the sector.   

Where there’s muck there’s brass…and gas. This week’s $2 billion (£1.7 billion) deal to buy Europe’s biggest biogas producer might encourage more investors to consider one of the less photogenic forms of renewable energy.

Politicians are queuing up to be snapped in front of solar panels and wind farms, but fewer are keen to be seen spouting off in front of a pile of dung in an anaerobic fermentation vessel. Perhaps that’s why there wasn’t much publicity when the oil giant Shell (LSE:SHEL) said it is buying Denmark’s Nature Energy Biogas, which makes green fuel out of agricultural, industrial and household waste. Without putting too pongy a point on it, this business makes methane out of stuff some folk would pay you to take away.

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Huibert Vigeveno, Shell’s downstream director, said the deal will boost cash flow with double-digit returns and aid the petrol pumper’s aim to produce net-zero carbon emissions by 2050. He burbled: “We will use this acquisition to build an integrated renewable natural gas (RNG) value chain at global scale, at a time when energy transition policies and customer preferences are signalling strong growth in demand.”

Coming down from the clouds of methane and macroeconomics, tried and tested investment trusts offer a convenient and cost-effective way to obtain professionally managed exposure to this increasingly important sector.

Better still, from the point of view of bargain-seekers, recent events have hit renewable energy providers’ share prices, knocking the wind out of their sails and leaving solar panels under a cloud.

For example, Ecofin Global Utilities & Infrastructure (LSE:EGL) is my biggest and most diversified exposure to renewable energy. I paid £1.52 per share in September 2019, and watched them tick up to £2.52 this summer before the British government’s idiotic decision to impose windfall taxes on a sector it also claims it would like to encourage.

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Never mind the international agreements our government has signed, committing Britain to reach net zero by whenever. Here and now, our politicians really believe they need renewable energy shareholders’ money more than we do.

To be fair, the complex and counter-productive measures announced by Jeremy Hunt in his Autumn Statement were not as bad as feared immediately after Kami-Kwasi Kwarteng’s market-shocking mini-budget. So, after EGL initially plunged to £1.90, the shares have recovered to £2.14 this week.

Although EGL is now ex-dividend, it yields nearly 3.6% annual income while trading at a modest 5% discount to its net asset value (NAV) with a stock market capitalisation of £234 million. Its most valuable underlying holding is NextEra Energy Inc (NYSE:NEE), an American business that is the world’s biggest producer of renewable energy. Other EGL assets include the big hydropower generator, SSE (LSE:SSE), formerly known as Scottish & Southern Energy, and Drax Group (LSE:DRX), the Yorkshire-based business that makes fuel out of biomass.

Even after recent political setbacks, this trust has produced total returns of 95% over the last five years and 5% over the last year, according to independent statisticians Morningstar. EGL was launched in September 2016, so lacks a 10-year track record.

However, it has managed to gradually increase dividends by an annual average of nearly 3% over the last five years and its next quarterly payment of 1.85p per share is due this week. EGL is now knocking on the door of my top 10 holdings by value and, when cash becomes available, I intend to buy more.

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But it would be wrong to underestimate the risks involved in the global transition to renewable energy. Gore Street Energy Storage Fund (LSE:GSF) Fund, the industrial-scale batteries specialist, needed to smooth out inevitable power supply fluctuations when the wind won’t blow and the sun don’t shine, has generated 6.2% annual income. But this £525 million investment trust, formed in 2018, produced negligible returns of 3.2% over the last year.

Worse still, sterling-denominated shares in US Solar Fund (LSE:USF) have shrunk from the 79p I paid in November 2020, to trade at 73p today. By last summer, they had crept back up to my starting price before the board announced - still somewhat mystifyingly - that the business is up for sale.

Lacking an obvious buyer, this declaration was followed by a substantial slice of USFP’s stock market valuation disappearing into thin air. Fortunately for them, none of the directors has invested as much as one year’s fees in the shares of this company, according to research by analyst Investec. The same source reports the four of them are each paid between £40,000 and £60,000 per annum.

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This small shareholder can’t really claim to feel I am getting great value here. But USFP’s dividend yield of 6.7% serves to keep me stoical and I suppose a bidder might emerge to narrow this £321 million trust’s 14% discount to NAV.

On a brighter note, it’s good to see Shell showing up with hard cash to buy Europe’s biggest business that makes power out of poo. It gives grounds for hope that this least photographic form of renewable energy might yet prove profitable for shareholders - whatever the fat cats and politicians throw at us.

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

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