Renewable energy investment trusts

I’ve been monitoring a number of Investment Trusts providing renewable energy for a while but haven’t yet invested in any. The ITs have continued to have a pretty large premium of 10%+, rarely reducing and I haven't been agile enough (or paying enough attention) to catch the infrequent dips. There are also quite a few listed businesses providing interesting and innovative products that could help contribute to some of the solutions to reducing our use of fossil fuels, but many of these are currently small and still trying to scale their products.

Recent activism by groups concerned by human impact on the climate has put this issue front and centre of many news media agendas. This is understandable when you look at some of the consequences of climate change; the Intergovernmental Panel on Climate Change (IPCC) reporting showing the trend of global warming, and it’s likely impact is here. There’s also plenty of material available via Google, I found this McKinsey report interesting.

There has also been an increase in the publication of articles on how investors can adapt their approach to ensure they are helping to be part of the solution rather than part of the problem. Morningstar recently published a number of articles on ESG (Environmental, Social, Governance) themed investing, just scrolling down their news archive shows how often this crops up, and for a while they have offered a sustainability rating for funds. The Guardian has published several articles on the investment world's reaction to climate change. That there is a more general interest can be garnered from Google Trends - a simple search for "ESG" over the last 5 years shows a distinct increase over the last year:

Google Trends: use of the term "esg" in google searches.

A few options....

I’m not interested in trying to trade stocks, preferring to invest in businesses. Part of my reason for choosing an investment is usually some sort of long term tailwind behind the business. In other words if the business is likely to be bigger and better in 5, 10 or 20 years into the future, then it might be worth investing. It doesn’t have to take over the world, a sensibly run business that throws off plenty of cash is fine with me.

Renewable energy is a sector that clearly has a tailwind, and the IT's focussed on renewables have a number of characteristics that I find appealing, such as generous dividend yields and low volatility. Renewable energy costs have reduced, so the economics now seem to behind renewables too. But how should I assess the potential benefits and pitfalls of the investment trusts giving such easy access to this sector?

A visit to the AIC website shows 12 ITs that are invested in renewable energy infrastructure:

I think here we have the starting point for assessing how comfortable I would be investing in these. Factors to consider would include:

Premium/ Discount:
This is the difference between the value of the assets (NAV) and the price at which the shares are being bought and sold. This is the main reason for me holding back on investing. If we make the assumption that the share value will move closer to the NAV over time, then buying at a premium is potentially going to impact negatively on returns. Another related statistic is the average premium at which the shares have traded recently - this isn't available above but can easily be found at various places such as Morningstar.

Gearing:
The investment policy of each of these should detail the approach to borrowing and gearing being used by the business. It's really worth digging into the business reporting and accounts rather than the simple summaries above to get the fine details.

Size:

As we can see the value of assets for each trust varies from Gore street at £28m to Greencoat UK Wind at £2.7bn. I think this, along with trading volumes should give a clue as to how volatile the trading and price movements of any such investment might be.

Currency:

A number of these trusts have a part of their portfolio outside of the UK, so may be subject to foreign currency movements and/ or local legal and regulatory changes that differ from the UK. Two of the trusts operate entirely outside of the UK – GRP and USFP, so are more exposed to these factors.

Charges:

Ongoing charges are going to directly impact returns so keeping an eye on these is a no-brainer. Some of the charges above are a little eye-watering.

Something not included at the AIC summaries relates to subsidies and the payment structures that these businesses use. A lot of these have been heavily subsidised, both UK and foreign Government approaches to subsidising these developments could impact these businesses as many of them have already invested beyond the UK.

When it comes to payment structures, chewing through the following acronyms: ROC, CFD, FIT, PPA could give you a little indigestion. Power Purchase Agreements (PPAs) help to reduce the volatility of wholesale electricity prices which as you see below can move around a bit:

Ofgem have a number of useful links for understanding the above - of particular interest should be Renewable Obligation Certificates (ROCs).

Other potentially interesting businesses that I have taken a look at are below:

AFC Energy - developing fuel cell technology to use hydrogen to generate electricity
Aggregated Micro Power Holdings - operates renewable energy facilities and finances various decarbonisation projects
Ceres Power - developing fuel cell technology to use various sources including ethanol and hydrogen.
ITM Power - developing technology to use hydrogen as an energy source
John Laing Group - infrastructure investment including renewables
Kingspan Group - manufactures a range of sustainable products for the construction industry
Powerhouse Energy - developing technology to use waste plastics for electricity and hydrogen production
SIMEC Atlantis Energy - renewable energy provider
Nexus Infrastructure - energy infrastructure provider including electrical vehicle charging
Fulcrum Utilitilies - Another energy infrastructure provider including electrical vehicle charging
Terry Smith also has a version of his famous Fundsmith now with an ESG flavour, which I only recently noticed.

I have a small position in Fulcrum Utilities, keeping an eye on the rest.

If anyone is particularly interested in investing in companies contributing to renewable energy I suggest checking out the diyinvestor blog for some excellent reading material.

September 2019 portfolio update

Another volatile month, with crazy oil price movements, Trumpy being naughty, Bojo and Parliament butting heads over the tediousness that is Brexit. Some price reductions in some of the big defensive blue chips piqued the interest, but they aren't quite into buying territory. My guess is that some of the selling was due to Sterling showing signs of life, but also people moving out of the big international defensive stocks and into more UK facing businesses. I expect the portfolio exposure to big internationals will result in some share price decreases over the short term, I'm comfortable with that as I believe it is outweighed by long term benefits.

Portfolio
The portfolio was pretty much flat during September, just about getting into the positive, but behind the wider markets which were considerably more frisky. The portfolio was up 0.3% compared to my chosen benchmark the Vanguard FTSE All Share Accumulation fund which was up 3% over the same period.

Leaping like a salmon this month was Craneware (CRW) +40%. There didn't seem to be an obvious reason, maybe an institutional investor got interested, short covering...who knows.

Somero Enterprises (SOM) flopped -34% during the month after another soggy trading update that left investors less than impressed.

September share purchase: TEP
Telecom Plus (TEP) was a new entry to the portfolio this month. It got a brief mention when I took a look at some telecoms companies here, but not in any detail as (despite being listed by the LSE as a telecommunications firm) telecoms is only a part of it’s business. If you have a rummage on the internet you’ll find it calling itself Utility Warehouse – which is a relatively apt name for it. It makes money by providing a range of utility and "utility like" services, such as phone lines, mobile network, internet etc. However, it doesn’t build and manage the infrastructure - the pipes and wires - as such, but connects customers to the service providers, then manages the customer facing aspects such as support and billing. In this way it manages to offer some utility like defensive qualities, but also manages to avoid the huge capital costs that utilities and/or telecoms providers get saddled with. It has also managed to keep marketing and sales costs low by offering existing customers a chance of earning cash by getting them to sign up new customers.

ROCE has been in double digits over recent years, net profit has not been as high as I would like, but I’m prepared to ignore that given the defensive qualities of the business. They also have a reasonable dividend – clocking in above 4%, with regular annual increases, and low levels of debt. They seem to make a habit of getting awards for keeping customers happy, and have seen their customer numbers growing which is encouraging. I don’t see this as a fast growing business, but if they can keep slowly adding customers, keeping them happy, and increasing the dividend I’ll be content.

As with any utility company in the UK, it might well find itself in the cross hairs of a Labour government, should they get themselves into power. As an interface to utility providers, they probably wouldn’t fall into the bracket of “things Labour want to nationalise”, but any risk of labour treating this sort of business as a political football is unlikely to be reflect well in the share price. Since some of their profits are being paid to me, I might as well contribute to them by switching a few of my bills across to them too.