9% plus yields: how to navigate this investment trust sector

In the investment world, few sectors have experienced as sharp a reversal as renewable energy infrastructure trusts. Once buoyed by strong investor demand, these vehicles – powered by sun, wind, and waves – offered the appeal of clean energy alongside reliable, high-yield income.

But as interest rates climbed and sentiment turned cautious, the sector’s once-steady premiums to net asset value (NAV) gave way to steep discounts – from an average 7.2% premium at the end of 2021 to a 34.1% discount at the end of April this year.

“The renewable infrastructure sector has certainly been through the mill – wind or otherwise,” says David Liddell, a director at IpsoFacto Investor. “It’s important to note that the disastrous share price performance of many of these trusts has mainly been the result of this de-rating, rather than necessarily a fundamental loss in underlying value.”

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With interest rates cut again last month to 4.25%, is now the time for investors to reconsider the sector and its weighted average yield of 9.4%?

Headwinds

A perfect storm of challenges triggered the sector’s sharp de-rating. Chief among them were rising interest rates – making cash and bonds more appealing – and waning investor enthusiasm for renewables. These were compounded by a flood of new investment trust launches, government intervention, surging construction costs, and growing doubts over long-term viability.

William Heathcoat Amory, managing partner at Kepler Partners, cites Ørsted’s early May decision to cancel Hornsea 4 – a major UK offshore wind project – as a telling signal.

“The Hornsea 4 cancellation is illustrative of higher build costs and lack of transaction data, which has meant developers are less confident on returns,” he says.

An exodus of wealth managers hasn’t helped either. An obscure regulatory ruling on how costs are attributed has eroded the appeal of these trusts among fund-of-funds managers.

Ongoing consolidation within the wealth management industry has only added to the pressure. Nowadays for a wealth manager to consider an investment trust, the assets need to be around 300 million for it to have a sufficient amount of liquidity.

“A focus on liquidity, in part driven by the consolidation of wealth managers and the increasing use of model portfolios, means that many infrastructure investment companies that failed to reach scale are now off the radar for potential new investors,” says Numis analyst Colette Ord.

7IM, which previously held names such as Greencoat UK Wind (LSE:UKW) and Renewables Infrastructure Group (LSE:TRIG), has stepped back.

“At the end of 2024, we decided to exit most of the holdings,” says Jack Turner, head of ESG portfolio management. “The decision was based on doubts on when discounts would close but also the uncertainty on the success of underlying infrastructure projects, especially those linked to renewable technologies.”

Tailwinds

Others see green shoots – and an opportunity to buy at the bottom. For Ord, current pessimism is “excessive”, while Liddell and James Carthew, head of investment companies at QuotedData, describe the sector as “just too cheap” and “irrationally cheap”, respectively.

Ord highlights the disconnect between weak sentiment in listed markets and robust demand for infrastructure exposure in private equity and debt. “Banks continue to view the sector as a high-quality covenant, evidenced by the number of successful financings at both project and company level,” she adds.

Demand could be fuelled by as much as £50 billion in fresh investment under the government’s Plan for Change – an initiative involving the UK’s largest pension funds and aimed at boosting business and infrastructure.

Signatories to the agreement will commit 10% of their workplace pension portfolios to assets supporting economic growth, such as infrastructure, real estate and private equity, by 2030.

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“At least half that will be directed specifically to UK-based investments, expected to generate £25 billion for the domestic economy by the end of the decade,” says Darius McDermott, managing director at FundCalibre, the fund research firm. 

“And with the current level of global uncertainty, the UK looks an increasingly stable haven. We’re already beginning to see asset managers return to undervalued UK assets – particularly lower down the cap scale – which could mean falling discounts and rising capital returns for trust investors.”

There may be other longer-term political and economic forces at play, with Kepler’s Heathcoat Amory perceiving strong public support for renewable energy.

“I think the UK populace other than Reform voters are in favour of a significant expansion in renewable power, so Hornsea 4 may in time be met by further political or financial support to get built out, which may help turn sentiment.”

In the short term, he adds, a slowdown in wind turbine development could benefit existing assets. “Less development buildout will reduce the pressure on long-term power prices, one of the inputs into valuations, which will be a tailwind at the margin.”

Short-term opportunity?

Fairview Investing director Ben Yearsley points to a “fascinating area with what could turn out to be a short-term opportunity”.

In the core infrastructure sector, a Canadian pension fund has swooped on BBGI Global Infrastructure Ord (LSE:BBGI) in a £1 billion deal that represents a premium to NAV, while in battery storage Harmony Energy Income Trust Ord (LSE:HEIT) is being acquired at a 5% discount to NAV and 35% premium to where shares had been trading.

Ord at Numis says it “sends strong signals on valuation”. She expects consolidation to continue while share prices trade at such wide discounts.

Given the amount of takeover activity, “will there be any interesting ones left in a year’s time or will it be only the dross left?” asks Yearsley.

The sector spans a diverse range of strategies – solar, wind, hydrogen, energy efficiency and energy storage. Some trusts focus on one area, while others combine multiple technologies to balance seasonal generation and market cycles.

Single-asset-class trusts are more likely to become takeover targets, says Carthew – a prospect that could help crystallise value for shareholders. But trusts with broader diversification may offer greater resilience against shifting weather patterns and regulatory pressure.

“Geographic and technology diversification has benefits,” says Ashley Thomas, an analyst at Winterflood Securities. “This is currently demonstrated by the weak wind speeds experienced year-to-date across Europe, which has impacted wind generation. In contrast, solar generation in the UK has been strong in March and April, but relatively weak in Spain and Australia.”

As renewable capacity expands, Thomas expects to see more pronounced intra-day price volatility, with solar pushing down prices during bright summer days and wind doing the same on breezy winter nights.

The potential of locational pricing being introduced into the UK, as well as general regulatory or political risk in certain geographies, also supports the case for diversification, he adds.

Best buys

For investors sitting on the sidelines, there is one overriding reason to consider infrastructure trusts.

“Yield is the obvious and relevant answer,” says Mike Neumann, bespoke investment management director at EQ Investors.

This, he adds, applies both to income seekers and growth-focused investors. Investors can increase the value of their shareholding by reinvesting dividends and achieve capital growth over time without any additional cash outlay.

Yearsley agrees: “While there’s a short-term opportunity for discount narrowing and capital gains, it’s a long-term income-producing story you’re really investing for.”

He says the “good opportunities” lie in trusts able to secure long-term power purchase agreements – which tends towards solar, wind and hydro – and those with dividends covered by cash flow. His top picks are Greencoat UK Wind and Downing Renewables & Infrastructure Ord (LSE:DORE).

EQ is also a fan of Greencoat UK Wind, with its market capitalisation of £2.5 billion, -21.9% discount and yield of 8.9%. “It yields about twice that of a long-dated gilt and generates a significant level of cash even when wind resource is low,” says Neumann.

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Carthew finds it harder to choose just one name. “It’s hard to pick – I own a few – but I love Downing Renewables mainly because of the hydro and battery storage potential, and to me, this feels like a relatively lower-risk investment,” he says.

The top pick for both Ollie Clark, deputy head of research at WH Ireland, and Liddell at IpsoFacto Investor is the Renewables Infrastructure Group, which is predominantly exposed to wind, with additional exposure to solar and a growing interest in energy storage through its acquisition of Fig Power.

Clark rates the trust’s “risk dynamics”, while its near £1.9 billion size and fully operational, “quality” portfolio should help it to capture inflows from liquidity-conscious investors. “Despite the near 10% yield and these attractive characteristics, TRIG still trades on a discount of -28.2%,” he says.

Liddell, meanwhile, appreciates TRIG’s long experience in the sector (since its launch in 2013) and its size, which allows it to sell assets to other institutional investors without compromising its own viability.

“TRIG has shown the way in raising cash through divestments, which have been at an average premium to valuations of 11%, giving some justification to the level of NAV,’ he adds.

For an alternative approach, SDCL Efficiency Income Trust plc. (LSE:SEIT) focuses on reducing energy use through on-site generation and efficiency projects.

“Its holdings are diversified across sectors and geographies, with assets located in the UK, Europe, and North America,” says McDermott. The £480 million trust is trading on a -51.4% discount and yields 14.2%.