Ian Cowie: the troubled sector paying inflation-linked income

Winter Storm Fern, currently freezing a swathe of America from Maine to Texas, might be a sign of things to come - for good or ill.

As the world’s biggest economy suffers mass power cuts amid the worst weather for many years, with fears that something similar might be heading this way, the importance of robust and effective energy infrastructure is obvious.

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Unfortunately, local and central governments lack the cash to fund the improvements needed to provide all the electricity that modern populations expect to plug into - but private investors can help to keep the lights on.

Investment trusts in the Association of Investment Companies’ (AIC) Infrastructure and Infrastructure Securities sectors enable individual shareholders to combine to fund the massive sums of capital required for new electricity generators and grids.

Better still, both can deliver capital growth and inflation-linked income.

The utilities fund making good returns

Utilities funds might sound boring but there’s more to investment than excitement and even evil shareholders (boo, hiss!) can sometimes do well by doing good.

For example, Ecofin Global Utilities & Infrastructure Ord (LSE:EGL) is the last trust left trading in the Infrastructure Securities sector but generated inspiring share price total returns of 37% over the last year. The shares trade on a 3.5% dividend yield.

EGL’s total return came to 59.2% over five years and it lacks a 10-year record for a few more months, because it wasn’t launched until September 2016. But I think my second-most valuable investment trust shareholding could celebrate its first decade in style, if this overlooked and under-valued sector returns to favour.

With markets in America and Britain beginning to anticipate lower interest rates imminently, shares paying a decent income might achieve higher valuations.

For those of us who wouldn’t know one end of a graphics processing unit (GPU) from another, many artificial intelligence (AI) technology stock values are mystifying but it’s easy to see where EGL makes its money.

National Grid (LSE:NG.), Britain’s biggest electricity distributor, is the top underlying holding, accounting for 4.2% of the fund.

Then, in descending order, there is Enel SpA (MTA:ENEL), the Italian electricity and gas supplier; NextEra Energy Inc (NYSE:NEE), the American giant that claims to be the world’s biggest generator of renewable energy and Iberdrola SA (XMAD:IBE), the Spanish multinational electricity utility.

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Further down the top 10, there is Constellation Energy Corp (NASDAQ:CEG), another American power company that focuses on carbon-emission-free electricity.

Its nuclear, hydro, wind, and solar plants and farms currently power 16 million homes, providing about 10% of the US’ clean energy.

With or without bad weather, demand for the electricity these businesses create is unlikely to go away - and the AI boom in power-hungry data centres strongly suggests it will increase.

EGL’s ongoing charges of 1.29% are on the high side but Jean-Hugues de Lamaze, who has been the manager since launch, has steered this trust away from the troubled water sector, and earned the modest 5% discount to NAV at which the shares currently trade.

Cheaper trusts

Bargain-hunters may prefer funds in the AIC’s formerly fashionable Renewable Energy Infrastructure sector, which is still under a cloud, having fallen from favour with politicians on both sides of the Atlantic.

Donald Trump, the erratic American president, is proud to broadcast his hatred of “windmills”, apparently because they spoil the view from his Scottish golf courses.

Keir Starmer, the British prime minister, hasn’t helped either. He has done nothing to reverse idiotic windfall taxes imposed on North Sea energy providers, clean or dirty, by the equally clueless Conservatives.

Despite that dismal backdrop, International Public Partnerships Ord (LSE:INPP) managed to generate total returns of 24% last year from an underlying portfolio that includes Cadent, Britain’s biggest gas distribution business, that accounts for 15% of this fund’s NAV.

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Other top 10 assets include Lincolnshire Offshore Transmission Owners (OFTO), and Moray East OFTO, which operate the undersea cables that connect wind farms to the National Grid. These businesses currently provide clean power to 240,000 and 1.4 million British homes, respectively.

Less happily, INPP’s charges are steep at 1.14% and it suffered a marginal loss of 1.4% over the last five years, partly because competing risk-free interest rates remained higher elsewhere for longer than expected.

More positively, this trust returned 50.1% over the last decade and currently comes with a yield of 6.9%. The shares continue to trade 15% below their NAV.

The big income play

Where a very high and rapidly rising income is the priority, alongside out-of-favour green credentials, Greencoat UK Wind (LSE:UKW) is worth considering.

The wind-farm operator currently yields an eye-popping 10.6% while the shares are priced 31% below NAV.

All those numbers are large enough to ring alarm bells in the minds of cautious investors, so it would be wise to recall that dividends are not guaranteed and can be cut or cancelled without notice.

Another worry is UKW’s “total return” loss of 13% over the last year, following a loss of 0.9% over five years, albeit offset by a gain of 69.4% over the decade.

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More positively, UKW’s charges are modest at 0.95% and it has increased dividends in line with the Retail Prices Index (RPI) every year since launch in 2013.

However, it’s important to beware that the UK government is switching its Renewables Obligation (RO) and Feed-in-Tariffs (FiT) benchmark to the persistently lower Consumer Prices Index (CPI).

Never mind all the talk about net zero, it just goes to show that there’s no problem so bad that political intervention cannot make it worse. Winter is coming and we won’t thank them if the lights go out!

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

Ian Cowie is a shareholder in Ecofin Global Utilities and Infrastructure (EGL), Greencoat UK Wind (UKW) and International Public Partnerships (INPP) as part of a globally diversified portfolio of investment trusts and other shares.