Ian Cowie: where to find high yields and big discounts

Renewable energy can help Britain cut carbon emissions by at least 81% by 2035, the prime minister told the climate change talking shop, COP29, this week.

However, Sir Keir Starmer dismissed fears that ordinary folk will be forced to fly less frequently and eat much less meat to hit his CO2 target.

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Both lifestyle changes were mandated in the original research upon which the suspiciously specific 81% target is based, but Starmer said: “I don’t think that as we tackle this really important issue, the way to do it is to tell people how to run their lives and instruct them how to behave. I’m not going to do that.”

Basing the green conference in Baku, Azerbaijan, was always problematic because oil and liquefied natural gas (LNG) are so plentiful in this country. By contrast, senior political leaders were scarce at COP29, with high-profile absences including America’s Joe Biden, China’s Xi Jinping, the European Union’s Ursula von der Leyen, and India’s Narendra Modi.

However, the American president-elect, Donald Trump, was probably the most prominent non-attendee at COP29. He has described climate change as “a hoax” designed to give China competitive advantages over America, and repeatedly emphasised his preference for oil and LNG with the phrase: “drill, baby, drill”.

Whichever opposing view on fossil fuels and renewable energy proves right, Mr Market is plainly fed up with the latter, which have fallen out of fashion. But are green funds oversold and undervalued?

Investment trusts in the Association of Investment Companies (AIC) “Renewable Energy Infrastructure” sector are currently priced an average of nearly -27% below their net asset value (NAV). In other words, these 21 trusts typically present bargain-hunters today with a “buy three, get one free” offer.

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History amply illustrates the risks. The average renewable investment trust shrunk shareholders’ money by -6.2% over the past year. Worse still - after allowing for time value and opportunity costs - they lost -2.1% over the past five years. More happily, they gained a positive total return of 71% over the past decade.

To put those numbers in perspective, independent statisticians Morningstar calculate that the average returns among all types of investment trust were consistently positive at 22% over the past year, 47% up over five years and 170% over the decade. No wonder the typical investment trust trades at a modest -4.3% discount to NAV.

Even the top-performing renewable investment trust over the past decade and five years has struggled recently. Greencoat UK Wind (LSE:UKW) leads its sector with 106% total returns over the longer term and 17% over the medium term, but lost 2.5% over the past year.

On a brighter note, the average renewable trust pays us to be patient with an inflation-busting dividend yield of 8.7%, which has risen by an annual average of 5.8% over the past five years. For income-seekers, that beats the typical trust of any description which yields 3.5% rising by an annual average of 6% over five years.

Never mind the generalities, UKW is a specific example of how renewable energy can generate high and rising income; this £4.7 billion fund yields 7.7%, rising by an annual average of 8.1% over five years. It is important to beware that dividends are not guaranteed and can be cut or cancelled without notice. Even so, if UKW could sustain its current rate of rising dividends, shareholders’ income would double in less than nine years.

Nor are renewable energy opportunities restricted to the AIC sector that bears their name. Ecofin Global Utilities & Infra Ord (LSE:EGL) sits in the “Infrastructure Securities” sector but this £256 million fund’s underling assets include NextEra Energy Inc (NYSE:NEE), one of the biggest renewable electricity companies in the world with extensive solar assets, plus Constellation Energy Corp (NASDAQ:CEG), whose low or no-carbon portfolio includes nuclear power.

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This diversified portfolio delivered total returns of 30% over the past year and 47% over five years but, having been reconfigured and relaunched in 2016, lacks a decade’s performance.

Earlier, I first invested in what was then called Ecofin Water and Power Opportunities in 2011, when I paid £1.22 for shares that trade as EGL at £1.88 this week. Better still, there is a 4.4% dividend yield, rising by an annual average of 5% over five years.

Here and now, EGL is my most valuable investment trust, sitting just outside the top 10 “forever fund” shareholdings, albeit not far ahead of the oil giant Exxon Mobil Corp (NYSE:XOM). Readers who want diversified exposure to oil via an investment trust, might favour BlackRock Energy and Resources Income (LSE:BERI), whose underlying portfolio includes Exxon Mobil as well as Shell (LSE:SHEL), but its 3.7% yield, rising by 2%, feel a bit underwhelming.

While blowhards on anti-social media seem to imagine we must back one extreme or another - Starmer or Trump, wind and solar or oil and gas - investors may hedge our bets. We can own a bit of both.

When it comes to the great debate about how we will keep warm and in work in future, I admit to being a Socratic shareholder. To paraphrase the Greek philosopher, perhaps best known for the paradox that bears his name, all I know is that I don’t know.

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