10%-plus yield but hit by rate rises: will performance turn around?

In the first part of our interview with Greencoat UK Wind, manager Matt Ridley addresses why the investment trust has produced a sizeable loss over three years and flat returns over five years.

For investors sizing up the sector in the hope of a turnaround in performance and sentiment, Ridley notes that lower valuations are an advantage, and makes the case for why investors should consider the higher-yielding renewables sector over UK gilts.

He also explains how Greencoat UK Wind (LSE:UKW) invests, and says that potential rationalisation in the sector isn’t baked into its valuation.

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Kyle Caldwell, funds and investment education editor at interactive investor: Hello, and welcome to our latest Insider Interview. Today in the studio, I have with me Matt Ridley, fund manager of Greencoat UK Wind. Matt, thanks for coming in today.

Matt Ridley, manager of Greencoat UK Wind: Thanks for having us, Kyle.

Kyle Caldwell: Matt, for my first question, I would like to go straight into performance. So, the share price has produced a sizable loss over the past three years and only a small gain over the last five years. And that’s in total return terms. The sector has struggled. You’re far from being alone. What would you say have been the main reasons behind that underperformance?

Matt Ridley: To address where we are now, we have to go back to the beginning. So, if you think about the sector, Greencoat UK Wind was the first fund to list in it in 2013, and during the next basically 10 years, you had a period of really low interest rates.

When that happens, you have more and more products come along, the sector grows, there really wasn’t anywhere else for investors to get income. Then you have the change in the rate climate, and suddenly there are a lot of other places for people to get income. Not all the investors who are in our sector want to stay there.

And when that happens, you have, in effect, an imbalance between the supply of products, the market cap of the sector, and the remaining inherent demand, and that’s where we are now. So, that’s the sentiment.

In terms of what can we do about it, well, we’ve been very active. We’ve spoken today (on 26 February) at length in our results about our capital allocation priorities going forward, what we’ve delivered in the last year, the disposals, the de-gearing, the buybacks.

What we’re also saying, and we said this in our results this morning, is that it’s probably a sector that we see rationalising over time, and I think it will be much healthier if you have fewer larger companies. We can’t wave a magic wand to make that happen, but what we can do is still stick to being disciplined in terms of our capital allocation.

Kyle Caldwell: And for investors buying into the sector today, what is the hopeful case for recovery and what are the big challenges that investors need to be aware of?

Matt Ridley: I think if you’re buying into the sector now, you’re obviously buying in to a valuation that’s relatively discounted versus how we fair value the assets. So, if you buying in now, that’s an advantage.

Of course, I can’t give advice to your customers, but if you look at it, you have to think very carefully about which company you’re buying, they’re not all the same, they have differences.

If you are buying for income, is that income sustainable? That’s the sort of thing that you should think about. What’s the track record of paying it? How does it look going forward?

We’ve been very clear on that in our results presentation today. I think the recovery case is that the sector rationalisation that I mentioned earlier, it’s not baked into our valuation, obviously. So, I think if you live in a world where you have a healthier sector, fewer companies that are larger, those that are left have space to prosper.

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Kyle Caldwell: 2025 brought bad news for the sector. There was a curveball from the government which announced that it was looking to move the inflation linkage to certain subsidies from RPI to the lower CPI measure. That policy was recently confirmed, but we also had lower wind speeds in the first half of last year. Is that a blip or do we need to manage expectations in the future?

Matt Ridley: That’s a very fair question. If you look at the changes that were made in government policy that have affected how we inflate the principal subsidy that we receive, certainly, yeah, it’s a headwind for the business. But we also have to zoom out a little bit and come back.

This business has been operating for...this morning was its 13th annual results presentation. Over that time, we’ve generated £2.4 billion of free cash to use, £1.4 billion has gone in dividends to our investors, and £1 billion has come back into the business. So, it’s important not to just over-index recent behaviour and recent things that have happened. There have been other bumps in the road that Greencoat UK Wind has survived, and it’s the same long-term view that you have to think about when you look at wind resource and how that works.

So, over an average year, wind is variable, it’s volatile, it has a standard deviation of about 10% in terms of energy production. Over 30 years, that’s more like 2%. So, you will have years that are over, you’ll have years that are under. As we showed in our results presentation this morning, the second half of last year we saw a return to a normalised wind-speed environment. And so far in Q1 to date, we’re ahead of budget. So, it is going to move up and down again, it’s about thinking about the longer term.

Kyle Caldwell: As a result of those interest rate rises, investors can get a pretty decent yield now from bonds and even the safest parts of the bond market, such as gilts. Could you make the case for renewable energy infrastructure over bonds? Of course, the sector has higher yields, but it also carries higher risk.

Matt Ridley: Yeah, I think that’s a fair observation. When you look at how we value the future cash flows that we expect to get, we discount them back to today’s value. That’s the valuation for all the funds in this sector. And with the advent of higher interest rates and the appreciation in, for example, the 10-year gilt yield, we moved our discount rates up materially.

So, looking on a net asset value (NAV) basis, our return gross is around 11%. If you’re buying it at today’s price, that’s around a 13% to 14% return. We think that premium over, say, a 10-year gilt yield at 4% is more than adequate as a risk premium for buying the stock.

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Kyle Caldwell: As the name suggests, you focus on wind farms in the UK, although there is some nuance here, as you’ve got exposure to both onshore and offshore projects, and a variety of different holdings in terms of the age of the assets. How do you see the portfolio evolving on that front over time?

Matt Ridley: We’ve spent 12 years compiling 49 assets. They are all fantastic. They are different, as you say. Some are onshore, some are offshore. Some are smaller, some are larger. Some in Scotland, Wales, England.

Really, when you look at a new investment opportunity, you have to make sure you price risk adequately.

Part of the beauty of Greencoat UK Wind’s model is that it’s very simple. There is a slide that we love using, which is ‘buy wind farms, generate electricity, receive cash, pay to shareholders, reinvest’. It’s a very simple business model. It operates in one geography. It operates on one technology. So, it’s de-complexified from the very beginning.

When you think about how the portfolio evolves over time, when we launched at IPO in 2013, I think the average age of the assets we acquired was five or six years old. Today, it’s nine years old, yet we’re 13 years on. So, what that tells you is that over time what you need to do is refresh the age of your assets. We’ve done that in the past by buying more assets to be younger, and that just keeps the set of cash flows that you’re going to receive into the future higher and higher and growing.

So, you could expect to see portfolio rotation from us. And when we get back to reinvesting in assets, probably a preference for younger assets to keep that portfolio age in line of where we want it.

Kyle Caldwell: The focus on wind alone does mean that you have a less-diversified offering than some other renewables names. Could you see the investment trust reaching for greater diversification over time?

Matt Ridley: Again, in our results today, we spent a lot of time talking about the market backdrop for renewables.

I’m sure many of your viewers will have seen the government’s Allocation Round Seven, that’s its CfD (Contracts for Difference) programme, which awards new subsidy contracts to renewable generators. That cleared around 15 gigawatts of new renewable capacity, about two-thirds of that is wind. So, if you look at just that market alone, that’s a significant amount of capital that’s needed. And that’s very much the cornerstone of what Greencoat UK Wind does.

We also have opportunities to reinvest in our own portfolio of assets, and we know how those wind farms are going to add value to our shareholders over time. So, the bar is relatively high, right? Given that there’s so much to do in wind, and that’s what we have in this fund expertise for, would we consider alternatives? I think you’d have to look at how those assets or those geographies, whichever it is, fit into the contextualisation of having a simple business model where you already have a really big opportunity to invest in the things that you do already. So, I’d say the bar’s high.

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Kyle Caldwell: Given that some rival funds also focus on wind, what kind of edge do you think Greencoat UK Wind offers?

Matt Ridley: I think it’s that concentration and expertise on what we have. I think we’re somewhat synonymous with the ownership of operational assets. We’re the first fund to launch, to create the space, the track record’s there.

We work with a lot of highly valued utility partners, many of whom we’ve bought assets from. I think they enjoy the experience of operating assets alongside us. We’re a good partner.

And the team that have been running the fund and behind it, they just have huge experience in terms of managing wind farms, not just the financing, but the operations.

Myself, I’ve been investing in UK wind farms for about 16 years, and the business has been going for 13. So, really, the depth of our expertise and scale, we’re the fifth-largest owner of wind assets in the UK, they kind of speak for themselves.

Kyle Caldwell: Matt, thank you for your time today.

Matt Ridley:Thank you, Kyle.

Kyle Caldwell: That’s it for our latest Insider Interview. For more videos in the series, do hit that subscribe button and hopefully I’ll see you again next time.