Ian Cowie: those who follow the crowd risk paying over the odds

Our columnist is a fan of renewable energy investment trusts, but only if the price is right.  

Investors should be wary of sheepishly following the herd because we might end up at the abattoir. That’s why, when this fan of renewable energy investment trusts considers what to do with my new ISA allowance this April, I am feeling a bit, er, baaaad.

Renewable or ‘green’ funds and shares are all the rage right now. But nothing fades as fast as fashion and the danger for investors who feel comfortable in a crowd is that it encourages us to pay too much.

For example, shares in the Association of Investment Companies (AIC) Renewable Energy Infrastructure sector are currently trading at an average premium of 10% to their net asset value (NAV). Double-digit premiums include 18.3% at Octopus Renewables Infrastructure (LSE:ORIT) and 18% at JLEN Environmental Assets Group (LSE:JLEN) and 17.7% at Gresham House Energy Storage (LSE:GRID).

For the avoidance of doubt, that means buyers of these shares today obtain about 82p of NAV for every £1 they pay. That’s not an attractive entry point for those of us who can remember when many investment trusts traded at 20% discounts to NAV and buyers back then obtained £1 of value for 80p.

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Here and now, expensive shares are not necessarily bad because they can deliver good returns. For example, GRID is the top performer in its sector over the last year with a total return of 33% and a current dividend yield of 6.1%, according to Morningstar.

Over more meaningful periods, such as the last five years, the sector top performers are Bluefield Solar Income Fund (LSE:BSIF), Greencoat UK Wind (LSE:UKW) and Renewables Infrastructure Group (LSE:TRIG), with total returns of 75%, 56% and 55%. The dividend yields are 6.1%, 5.5% and 5.5%, respectively. Each might be seen as sufficient justification for current premiums of 14.5%, 7.4% and 7.9%.

Even so, I felt more comfortable much nearer to NAV when I first gained exposure to renewable energy by investing in the green hydrogen-maker, ITM Power (LSE:ITM), at 41p per share in January 2010. Then I took profits prematurely in this Sheffield-based tiddler at 56p the following March before reinvesting at 124p in January 2020. Despite more profit-taking at 539p earlier this year, ITM remains my fourth-most valuable shareholding and trades at around 475p now.

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Similarly, for more diversified exposure and less risk, I paid 152p per share in Ecofin Global Utilities & Infrastructure (LSE:EGL) in September 2019. Sure enough, the rewards have also been lower with the shares trading at 183p now - and a 1.5% discount to NAV - while yielding 3.7% income.

Never mind the past, what about the present and the future? Many governments around the globe are committed to replacing fossil fuels with renewable energy, such as green hydrogen, solar and wind power.

Next November will see the 26th United Nations’ Climate Change Conference (COP26) in Glasgow. Among other things, this will discuss how to progress the UN Paris Agreement of 2015 where 197 countries pledged to reduce pollution and create “a more sustainable future for all by 2030”.

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Most recently, US president Joe Biden announced plans last month to invest an eye-stretching $2 trillion (£1.4 trillion) in infrastructure and green initiatives in addition to a $1.9 trillion commitment to counter the economic impact of the coronavirus approved by Congress earlier this year.

The latest plan aims to invest up to $621 billion in funding for traditional infrastructure upgrades, including roads, bridges, public transport networks, electric vehicles, ports and airports. Biden also aims to invest $561 billion in green - or renewable and energy-efficient - housing, schools and water.

Whichever way you look at it, that’s a lot of money. Even the keenest ‘climate change-denier’ should consider the possibility that all this extra liquidity might lift asset prices higher.

Coming down from the clouds to a specific share, Gore Street Energy Storage Fund (LSE:GSF) aims to tap investor enthusiasm by issuing new stock at 102p, with April 22 the deadline for subscriptions. This specialist in large batteries to smooth out inevitable fluctuations in solar and wind power had traded as high as 114p and an 11% premium to NAV before the new share offer knocked the wind out of its sails, shrinking the price to 105p and the premium to nearer 3%.

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As someone who invested at 105p last November, largely for an income yield above 7%, I have mixed feelings about this. No shareholder likes to see the price fall but I had previously decided GSF’s double-digit premium was too expensive for further investments, which are now more affordable as part of this year’s ISA.

Only time will tell whether buyers today are followers of fashion who are paying too high a price for inflation-busting income or if there might be wisdom in this crowd.

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

Ian Cowie owns shares in Ecofin Global Utilities & Infrastructure (EGL), Gore Street Energy Storage Fund (ESG) and ITM Power (ITM) as part of a globally-diversified portfolio of investment trusts and other shares.