Ian Cowie: the lessons I’ve learned from one of my losers

Our columnist reflects on how buying this investment trust two years ago has left him under a bit of a cloud.

An occupational hazard of writing a column like this can be to sound smug by talking too much about winners and not enough about losers. But I believe it is important to report the rough - as well as the smooth - of stock market investment.

So here goes; buying shares in solar energy has left this small investor under a bit of a cloud. To be specific, US Solar Fund (LSE:USF), a $318 million (£275 million) investment trust, has taught me several lessons, including that renewable energy is not a panacea for income-seeking investors and that patience does not necessarily pay off.

It also demonstrates a risk unique to investment trusts, the danger that shares priced above net asset value can subsequently fall below NAV to turn a premium into a discount. Following fashion can be an expensive mistake or, as City cynics sometimes say, the problem with following the herd is that you might end up at the abattoir. 

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Perhaps another of my mistakes here was to put too much faith in an apparently impressive board of directors and to pay too little attention to their relatively modest investment in USF. According to ‘skin in the game’ research by Investec, none of the four directors appears to hold shares worth as much as the annual fees they are paid to sit on the board.

By contrast, I paid 79p per share to invest in sterling-denominated shares of US Solar Fund in November 2020, hoping this was a way to do well by doing good. At the time, I noted that the Association of Investment Companies (AIC) ‘Renewable Energy Infrastructure’ sector was trading at an average premium of 15% above NAV but USF looked better value, priced at a premium of only 4% above NAV.

I believed this investment trust remained under many investors’ radar because it was launched in April 2019, and had yet to hit its target dividend yield. Its chief executive officer Liam Thomas told me its 41 solar farms across California, North Carolina, Oregon and Utah were generating electricity and added: “We are in a strong position to commence a 5.5% dividend level.”

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The good news is that they did hit this target yield last year, helping the share price to recover from a one-year low-point of 68p and to return to 79p briefly.

However, then the board put the business up for sale earlier this month and the trust slid back down to trade at 77p - or a discount of almost 12% to NAV - while we wait to see what any buyer might pay.

Yes, I know that worse things happen at sea. But it still rankles to have waited patiently for the full dividend income to come on stream, only to see the business being put on the auction block.

More positively, a spokesperson for the company said: “USF has successfully executed its strategy of delivering a sustainable dividend for shareholders.

“However, structural challenges in the US solar sector alongside a recent sustained discount of the share price to its NAV have impeded the company's ability to grow its asset base. Given these challenges, the board has taken the decision to consider all potential strategic options to maximise shareholder value including, but not limited to, a sale of the entire share capital of the company.”

Apparently, this will be conducted under the framework of a ‘formal sale process’ in accordance with the Takeover Code, selling US Solar Fund’s portfolio and returning funds to shareholders or changing the fund manager.

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Ewan Lovett-Turner of analyst Numis commented: “We are not surprised to see the board reach this decision, given the weak performance of the shares.

“US Solar initially struggled to deploy its capital as quickly as it anticipated, and suffered fraud on an investment, although this was largely recovered in a relatively swift time frame. This, combined with a weak power price backdrop in the US, impacted valuations, despite the fixed price contracts which provide fully covered dividends.

“In many ways, it is positive to see a board admitting defeat and seeking a solution beyond trying to continue with the status-quo or making minor tweaks around the edges to a strategy.”

Similarly, Iain Scouller of analyst Stifel, said: “We think the decision to go down this route at least partly reflects the persistent discount the shares have traded on, which means it is not currently possible to grow the fund through acquisitions and equity issuance.

“We would expect any sale scenario to be concluded at a level much closer to NAV than the current share price, implying 10% plus upside for shareholders.”

Here and now, the beleaguered British government’s threats to impose a windfall tax on renewable energy producers should not directly affect USF, as its assets are in the US, but do rub salt into the wounds of this small investor in solar energy. Everyone wants a slice of any profits we might make but it seems that any losses are all our own.

No wonder it is sometimes said that success has a hundred fathers but failure is a bastard. Worse still, with windfall taxes on the way, it seems that no financial situation is so bad that political intervention cannot make it worse.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in the sterling-denominated shares of US Solar Fund (USFP) as part of a globally diversified portfolio of investment trusts and other shares.