Our columnist reports on a potential tailwind for investment trusts that invest in renewable energy. While it is a long-term theme that's likely to endure, he explains why it has been a mixed bag of performance for the three holdings he has.
Patriotism is often said to be the last refuge of a scoundrel but it could also prove to be a source of profit for investors willing and able to surf a $369 billion (£307 billion) geopolitical wave to repatriate production of renewable energy. Not many people know this but most of the world’s photovoltaic (PV) cells and silicon wafers needed to make solar panels are sourced in China. So your rooftop electricity isn’t just ‘green’ - it’s also ‘red’.
That might not have mattered much before Russia invaded Ukraine, focusing minds on where we get our oil and liquefied natural gas (LNG), or until China fired more missiles near Taiwan.
Now the US and the European Union are investing heavily in boosting home-grown renewables and the British government is said to be mulling reversing windfall taxes it imposed on renewable energy last summer. Accelerator, brake; accelerator, brake. Some things never change.
More positively, easily the most valuable initiative to ramp up renewables in democratic economies and reduce our reliance on dictatorships is America’s $369 billion Inflation Reduction Act (IRA), which is said to have already created 100,000 clean energy jobs.
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Closer to home, the EU used to produce 30% of the world’s PV cells as recently as 2007, according to the International Energy Agency (IEA). But European investment collapsed during the global credit crisis, while technological development continued in Asia, and the EU imported more than three-quarters of its panels from China last year. As Kadri Simson, the EU energy commissioner, pointed out recently: “Switching from fossil fuels to renewables should not mean replacing one dependency with another.”
Coming down from the clouds, investment trusts make it convenient and cost-effective for individual investors to obtain exposure to renewable energy and infrastructure; sharing the cost of professional stock selection and spreading risk over a wide range of assets. However, a great deal depends on picking the right investment trusts, as I know to my cost.
For example, the top performer over the last year in the Association of Investment Companies (AIC) ‘Renewable energy’ sector is Gresham House Energy Storage (LSE:GRID), which generated total returns of 29%, according to independent statisticians Morningstar.
Sad to say, I have shares in another trust that also invests in industrial-scale batteries to balance fluctuations in the supply and demand of renewable electricity. But Gore Street Energy Storage (LSE:GSF) delivered shocking negative ‘returns’ of -12% over the last year. The board of directors’ explanation has something to do with delays in investing capital, but this small shareholder feels close to blowing a fuse.
Similarly, you might have thought the self-descriptive US Solar Fund (LSE:USF) could not miss in a market being boosted by $369 billion of tax credits and other incentives. But my sterling shares in this investment trust, USFP, have fallen by 8% over the last year and, following the board’s announcement that the business is up for sale, remain under a cloud.
Perhaps the only positive things I can say about GSF and USFP is that they have succeeded in delivering dividend income of 7.3% and 6.9% respectively.
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Fortunately, my third - and biggest - investment trust focusing on renewable energy has done better. Ecofin Global Utilities & Infrastructure (LSE:EGL) sits in the AIC ‘Infrastructure’ sector but its biggest underlying holding is NextEra Energy (NYSE:NEE), which claims to be “the first company in history committed to moving past net zero all the way to Real Zero”.
Other businesses in EGL’s portfolio also have substantial exposure to renewables; including the Italian giant Enel (MTA:ENEL), formerly ‘Ente nazionale per l'energia elettrica’ (ENEL); its German rival RWE (XETRA:RWE) (RWE); and the French energy, water and waste management group Veolia (EURONEXT:VIE).
But Europe has a long way to go to catch up with the Chinese. Steven Xuereb, a director of the solar company Photovoltaik-Institut Berlin, explained: “Everyone’s excited about the new Enel plant in Sicily, which will produce 3 gigawatts (GW). The Chinese giants are announcing new 20GW factories.”
Despite all the stock markets’ recent difficulties, EGL generated total positive returns of 5% over the last year and 122% over the last five years. It also delivers a dividend yield of 3.8%, rising by an annual average of 2.95% over the latter period. Shares I bought for 152p in September 2019, now cost 206p, earning EGL a place in my top 10 holdings by value.
All the above investment trusts and businesses could benefit from American and European efforts to encourage home-grown energy. The West has already imposed sanctions on Russian oil and there is rising anxiety about relying on China for our solar power. This combination of carrots and sticks should support valuations and make renewable energy an opportunity for investors to do well by doing good.
Ian Cowie is a freelance contributor and not a direct employee of interactive investor.
Ian Cowie is a shareholder in Ecofin Global Utilities & Infrastructure (EGL), Gore Street Energy Storage (GSF) and US Solar Fund (USF) as part of a globally diversified portfolio of investment trusts and other shares.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.
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