Ian Cowie: the top-yielding trust in my ‘forever fund’

Out columnist points out that investment trusts demonstrate how shareholders don’t need to be short-changed by inflation.

Inflation is the insidious enemy of savers and investors because it means we get paid for our prudence with money that has less real value - or purchasing power - than the cash we put in. Fortunately, my top-yielding investment trust has just paid quarterly dividends to deliver an inflation-busting annual income of nearly 6.2%.

Better still, the industrial batteries specialist, Gore Street Energy Storage Fund (LSE:GSF), has also generated some capital growth. I invested at 105p per share last November, as reported here at that time, for a stock that currently trades at 115p. Both the income and gains are largely tax-free because I popped GSF in my individual savings account (ISA).

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Who says batteries are boring? GSF plays a vital role - even if it is often overlooked - in smoothing out inevitable fluctuations in solar or wind power. Its lithium-ion utility-scale batteries around Britain keep us warm and the lights on when the sun ain’t shining and the wind won’t blow.

Winter is coming, raising demand as supply falls, so the ability to store renewable energy is likely to become even more important. No wonder GSF is exploring opportunities in America and Western Europe, as well as building two sites in the Republic of Ireland, where the National Treasury Management Agency - akin to a sovereign fund - is this investment trust’s third-largest shareholder. Other big investors include BlackRock, Herald and - leading the pack - Rathbone Investment Management.

To be fair, I could have done even better with batteries if I had opted for GSF’s rival in the Association of Investment Companies (AIC) Renewable Energy Infrastructure sector: Gresham House Energy Storage (LSE:GRID). The latter offers a lower dividend yield of 5.5%, but has shot the lights out over the last year with a total return of nearly 23%.

That places GRID at the top of this AIC sector, while GSF is ranked second with a total return of 17.3%. Longer-term performance is not yet available for GRID, as it launched in November 2018. GSF, which launched in May of the same year, has returned 41.9% over three years, ahead of the 23.1% gain for the AIC Renewable Energy Infrastructure sector.

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Here and now, both trusts trade at double-digit premiums to their net asset values (NAVs) of more than 16.5% at GRID and 15.3% at GSF. Worries about value are compounded by high ongoing charges of 2.15% for GRID and 2.74% for GSF, according to Morningstar via the AIC.

Neither negative factor prevented GSF from raising an additional £73.6 million in an oversubscribed capital raise last month.

Alex O'Cinneide, chief executive of GSF said: “We are looking forward to allocating the new resources against our significant pipeline of international opportunities. We remain focused on the market opportunity, in particular with expected growth across Europe and the US.”

He added: “In September, the company’s Great British storage assets that participated in the actively traded power markets generated revenues nearly two times their forecasts. This is due to increasing prices, volatility and the ability of storage assets to respond to the opportunities that the current market presents; which conditions are expected to continue in the short term.”

GRID and GSF show that income-seeking investors can do well by doing good with renewable energy. Or, as Prime Minister Boris Johnson enthused this week: “Green is good! Green is right! Green works!”

Coming down from the clouds, investment trusts demonstrate how shareholders don’t need to be short-changed by inflation, which is more than most bank or building society savers can say. Many investment trusts deliver dividends that match the rate at which money is losing its real value or purchasing power - and most of these trusts have increased shareholders’ income with inflation-busting payouts.

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For example, the average investment trust is currently yielding annual income of 2.9% after raising its dividends by 5.7% per annum over the last five years, according to Morningstar. To put those figures in perspective, the Office for National Statistics (ONS) reports that the Consumer Prices Index (CPI) was 3.1% higher in the year to September, compared to an annual rate of increase of 3.2% the month before.

Meanwhile, its Retail Prices Index (RPI) - which has fallen from favour for consistently producing higher measures of inflation - was rising at an annual rate of 4.9% last month, compared to 4.8% in the year to August.

You can decide for yourself which is the more realistic - CPI or RPI - when you next buy a train ticket, fill the car with petrol or eat out.

Either way, risk-averse savers in bank or building society deposits, whose priority is a nominal or face value guarantee, can rarely keep pace with inflation. But shareholders in investment companies, who are willing to accept stock market volatility, can hope to preserve or even grow the real value of our capital and income.

Ian Cowie is a shareholder in Gore Street Energy Storage Fund (GSF) as part of a global portfolio of investment companies and other shares.