Interactive Investor

The funds and investment trusts to profit from the energy revolution

14th March 2022 08:35

Sam Benstead from interactive investor

Increased urgency to ditch fossil fuels is good for clean energy funds. Here are some fund and trust ideas.

Russia’s exclusion from the global economy has delivered Western governments a rude wake-up call about the need to secure energy independence.

While in the short term this will lead to an increased reliance on fossil fuels, longer term it will become the impetus for more investment in renewable energy.

Since the invasion almost three weeks ago, investors have sent the S&P Global Clean Energy Index 20% higher. Renewable energy investment trust shares have also rallied, including Greencoat UK Wind (LSE:UKW), up 15%, and Bluefield Solar Income Fund (LSE:BSIF), up 8%.

Mark Lacey, head of global resource equities at Schroders, believes the conflict in Ukraine is good news for the sector, but clean energy shares could be in for a bumpy year as investors continue to turn away from more expensive stocks and high-growth stocks in the face of rising interest rates.

He said: “As conventional energy prices spike, the relative economic attractiveness of renewables continues to grow. This is the case even after considering the higher costs of equipment from supply chain constraints.

“The situation in Ukraine adds further credence to the argument for transitioning our energy system to one based on cheap, clean, reliable power.”

However, he also stresses that this shift in behaviour does not change the near-term growth and earnings forecasts for companies.

“Indeed, they could potentially be outweighed by more prominent inflationary risks. Supply chains are still disrupted and it takes time for new demand and projects to come through,” he said.

Gabriela Herculano, manager of the iClima Global Decarbonisation Enablers UCITS ETF (LSE:CLMP), points to Germany’s announcement this month to bring forward its target of having 100% renewable energy to 2035 from 2040 as evidence of the accelerated adoption of clean energy as a result of Russia’s invasion of Ukraine.

In addition, the International Energy Agency (IEA), which counts most developed nations as members, published a 10-point plan to reduce European Union reliance on Russian natural gas, saying: “Accelerating investment in clean and efficient technologies is at the heart of the solution.”

Its plan includes accelerating the deployment of new wind and solar projects and replacing gas boilers with heat pumps, which run on electricity.

Herculano adds: “We will also see the acceleration of two short-term solutions to the current energy crisis. First, more efficient energy use.

“Second, consumers embracing self-production. This means embracing behind-the-meter solutions such as solar panels and batteries. Therefore, we believe green growth is a theme that is bound to do very well."

Dzmitry Lipski, head of fund research at interactive investor, favours the VT Gravis Clean Energy Income fund and iShares Global Clean Energy ETF (LSE:INRG), which are both members of the interactive investor ACE 40 ethical funds list.

VT Gravis Clean Energy Income invests in a diversified portfolio of companies involved in the operation, funding, construction, generation and supply of clean energy. It aims to deliver a regular income expected to be 4.5% per annum after charges preserve investors’ capital throughout market cycles.

The iShares Global Clean Energy ETF tracks a basket of companies involved in clean energy, such as solar and hydrogen power to improve diversification. It changed its portfolio last year to include more companies to improve liquidity.

Lipski says: “The changes were positive, and we decided to keep recommending the fund. We reviewed other clean energy ETFs and concluded that iShares Global Clean Energy ETF remains the best option due to its broad, diversified exposure to the clean energy theme, improved underlying liquidity and its proven track record. It owns 76 stocks compared with about 30 last year.”

Lipski also likes the Polar Capital Smart Energy Fund, which is managed by the team used to run the successful RobecoSAM Smart Energy Equities fund. He described the fund as “one to watch”, having recently launched.

The Association of Investment Companies (AIC) classifies 22 investment trusts as “renewable energy infrastructure”. These include Gresham House Energy Storage (LSE:GRID) and Gore Street Energy Storage (LSE:GSF), which own batteries to store energy and release it on demand.

Many of these trusts have launched over the past couple of years. Just six have a five-year track record: Renewables Infrastructure Group (LSE:TRIG), Greencoat UK Wind (LSE:UKW), Bluefield Solar Income Fund (LSE:BSIF), Foresight Solar (LSE:FSFL), JLEN Environmental Assets Group (LSE:JLEN) and NextEnergy Solar (LSE:NESF).

Bear in mind that renewable energy infrastructure trusts tend to trade on premiums – just under a third of the sector (seven out of 21) are commanding a premium of over 10%. Some investors may feel it is worth paying a premium price, given that most trusts in the sector have a dividend yield above 4.5%. However, bear in mind that high premiums can fall and turn into a discount when conditions change.

FundThree-month return (%)One-year return (%)Three-year return (%)
Greencoat UK Wind16.7432.3934.9
Bluefield Solar Income9.814.2822.1
JLEN Environmental Assets Group9.284.221.22
Renewables Infrastructure Group6.8418.640.33
NextEnergy Solar Fund4.8110.748.85
VT Gravis Clean Energy Income4.2410.1166.42
Gore Street Energy Storage1.7219.1948.15
Gresham House Energy Storage1.3223.5348.96
iShares Global Clean Energy UCITS ETF-3.05-5.71126.83
iClima Global Decarbonisation Enablers UCITS ETF-14.76-6.68-

Source: FE FundInfo.

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