Why this investment trust sector has big winners and big losers

It is always important to look under the bonnet before buying a fund or trust, particularly those housed in this sector. Kyle Caldwell explains why.

Renewable energy investment trusts have grown in number over the past couple of years, with many proving popular with retail investors.

Research earlier this month by interactive investor found that six of the 10 most-bought sustainable strategies year-to-date have been investment trusts that invest in some form of renewable energy.

As well as investors looking to ensure their money is invested in businesses ‘doing good’ in some form or other, the high yields on offer (typically ranging from 4.5% to 7%) among renewable energy investment trusts is a key attraction, particularly at time when inflation is at its highest levels in decades.

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However, given the mixed bag of performance over the past year for investment trusts in this sector, it is important that investors look under the bonnet and understand how each invests. Of the 21 renewable energy investment trusts with a one-year track record, 14 have made a positive return over the past year, while seven have lost money.

In this instance the sector average return is less useful. The variety of strategies means investors risk comparing apples with pears.

Some of these specialist trusts invest in a niche area, either solar, wind, hydrogen, energy efficiency or energy storage. While others have a mix of renewable exposure, with some aiming to benefit both from when the wind blows and when the sun shines.   

Over the past year (as of 24 November), the average return is 11.6%. However, there’s been a wide range of returns. Six trusts have returned more than 20%, while five are down more than 10%.

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Topping the table, with a return of 31.7% is JLEN Environmental Assets Group (LSE:JLEN), up 31.7%, followed by gains of 29.9% and 26.4% for Gresham House Energy Storage (LSE:GRID) and Foresight Solar (LSE:FSFL).

At the other end of the table, with respective losses of -27.4%, -26.5% and -24.8% are Triple Point Energy Transition (LSE:TENT), HydrogenOne Capital Growth (LSE:HGEN) and Aquila Energy Efficiency Trust (LSE:AEET).

The wide range of returns reflects the different areas of focus. Michael Anderson, senior manager at Aquila Capital and portfolio manager of Aquila European Renewables (LSE:AERI), makes the point that “diversification is a widely accepted construct for risk mitigation which is deeply rooted in investment literature”.

However, in the case of renewable energy infrastructure investment trusts, he points out that “many are typically concentrated on a single technology (e.g. wind or solar panels), meaning opportunities for diversification can be limited, even if an investor attempted to do so themselves at their own portfolio level”.

Aquila European Renewables invests in wind, solar and hydropower generation assets throughout Continental Europe and Ireland. Over the past year, this has led to returns of 4.9%.

Anderson notes that this approach seeks to “take advantage of the varying seasonality of production across the different technologies while also diversifying exposure across different European countries, reducing the reliance on a single power market, minimising regulatory risks and providing more stable cash flow”.

In addition, another point to bear in mind is that half the trusts in the sector invest in just one region, with the UK being the most popular.

Anthony Catachanas, chief executive officer and manager of VH Global Sustainable Energy Opportunities (LSE:GSEO), which spreads its investments across various countries, says: “The energy transition is a global phenomenon, which does not take place in the same manner in all countries. It depends on the resources available in each country, the energy mix of each country and what each country’s specific transition path is.”

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Catachanas adds: “The energy transition offers investment opportunities in many jurisdictions around the world and the key to our investment strategy is to identify the right investment in the right context, i.e. what technology and infrastructure deployment can have the largest impact on the transition of a given energy market.

“In some countries it means investing in distributed solar (Brazil), in other markets it means depolluting the fuel’s value chain to address pressing public health issues (Mexico), in others it’s firming the grid with net-zero reliable power (UK), or with hybrid assets bringing additional renewable and storage for grid stabilisation (Australia).”

Having all their eggs in UK renewable energy assets puts some investment trusts at risk of the windfall tax announced in the Autumn Statement. From the start of next year, a tax of 45% will apply on excess profits for electricity generated in the UK.

However, the good news is that analysts expect only minor reductions to be made to net asset values (NAVs) for trusts that are impacted.

Numis, the investment trust analyst, said: “We believe share prices and discounts have been impacted by uncertainty around government action and concerns that NAVs could be significantly impacted.

“With the confirmation of the windfall tax in the Autumn Statement there is now more clarity, and assuming our initial post budget NAV estimates are correct (crude though they are), we believe the impact on NAV is less than the market had been anticipating in many cases.”