Ian Cowie: UK trusts aren’t cheap, so here’s what I’m backing

Next Monday’s UK International Investment Summit will see Prime Minister Keir Starmer pitch for more foreign funds to back British businesses. Fortunately, many London-listed investment trusts already make it cheap and convenient to obtain exposure - but one of the most interesting does not contain the words “British” or “UK” in its title.

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For example, consider the hot topic of renewable energy. Not many people now remember Boris Johnson’s brief enthusiasm for turning Britain into “the Saudi Arabia of wind”. 

Back then - and now - the problem with renewable power is how to keep a modern economy warm and in work when the wind won’t blow and the sun don’t shine. Industrial-scale batteries, such as those operated by specialist investment trusts including Gore Street Energy Storage Fund Ord (LSE:GSF) and Gresham House Energy Storage Ord (LSE:GRID), provide short-term solutions but in my view not long-term answers to the difficulty of balancing energy demand and supply.

Pumped storage hydropower (PSH) can utilise gravity in hilly or mountainous regions with plenty of water - such as Scotland or Wales - to store energy over any length of time. When renewable electricity from wind or solar sources is plentiful, it is used to pump water from a low-level loch or lake to a higher-level reservoir. Then, when renewable power is scarce, gravity is allowed to draw the water down through dynamos to generate sufficient electricity to supply demand.

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The technology has been in use for decades, with Britain’s four PSH facilities in Scotland and Wales delivering up to 2.8 gigawatts (GW) of electricity whenever needed. But capital costs are high - digging tunnels inside mountains don’t come cheap - and there are environmental concerns about disrupting or even destroying wildlife, such as salmon.

Even so, ways can be found for PSH to deliver cleaner, greener power than alternative sources such as coal, liquefied natural gas (LNG) or oil. Jean-Hugues de Lamaze, fund manager of the self-descriptive investment trust Ecofin Global Utilities & Infrastructure (LSE:EGL), told me: “As the world is turning to renewables to decarbonise, storage is becoming critical - and therefore increasingly valuable - to bridge intermittency and seasonality.

“Pumped hydro is currently the main storage source with about 90% of global capacity, according to the International Hydropower Association. There aren’t any concentrated large, stock market-listed pumped hydro companies in Europe, but several energy utilities own PSH assets.”

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For example, he cited EGL’s underlying holdings in the controversial British biomass generator Drax Group (LSE:DRX); Energias de Portugal; Italy’s Enel SpA (MTA:ENEL); Spain’s Iberdrola SA (XMAD:IBE), and the business formerly known as Scottish and Southern Energy, SSE (LSE:SSE).

De Lamaze added: “Iberdrola is a leader in pumped storage with 4.5GW of installed capacity in Spain and Portugal and the ambition to invest another €1.5 billion in storage over the next two years.

“SSE is developing the fully consented Coire Glas project in the Scottish Highlands - Britain’s biggest pumped hydro scheme in 40 years – which would more than double Britain’s current storage capacity.”

That extra PSH could go a long way to avoid excess electricity being earthed - or, essentially, thrown away - when there is too much wind and demand falls far short of supply.

Not that such problems have prevented Greencoat UK Wind (LSE:UKW) from topping the Association of Investment Companies (AIC) “Renewable Energy Infrastructure” sector over the past decade and five-year periods with total returns of 128% and 30% respectively, followed by 15% over the past year. UKW generates 7.1% dividend income, which has risen by an annual average of 8.1% over the past five years but remains priced -12.3% below the net asset value (NAV) of its £4.7 billion assets.

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Meanwhile, EGL has generated total returns of 35% over the past year and 48% over five years but lacks a 10-year record, as it was launched in September 2016. Income-seekers may also note its 4.2% dividend yield, which independent statisticians Morningstar calculate has increased by an annual average slightly above 4% over the past five years. Even so, shares in this fund with total assets of £276 million continue to be priced nearly -13% below their net asset value (NAV).

To put those numbers in perspective, it is notable that the AIC’s “UK Equity Income” sector currently offers similar average income - 4.1% - albeit rising more slowly by 3% per annum - and with a much smaller average discount of -5.4%. Nor do the AIC’s ‘UK All Companies’ or “UK Smaller Companies” sectors look terribly cheap on average discounts both currently around -11%; yielding 3% and 2.9% dividend income respectively.

No doubt Starmer will put a more positive spin on British bargains at next week’s UK International Investment Summit. Let’s hope this prime minister’s enthusiasm for renewable energy in general -  and PSH in particular - proves longer lasting than that of his predecessor, Boris Johnson.

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) and Greencoat UK Wind (UKW) as part of a globally diversified portfolio of investment trusts and other shares.