Why renewable energy trusts could be due for a rebound

That sensitivity partly reflects the fact that trusts borrow money to fund construction of new renewables infrastructure. But also, investors primarily regard these funds as income-generating assets. So, when interest rates rise – driving higher yields on fixed-income securities including government bonds – investors have opportunities to find that income elsewhere, potentially from assets they see as less risky such as government-issued gilts.

Nevertheless, current valuations of renewable energy investment trusts are striking, particularly in the broader market context: a world that is simultaneously desperate to increase energy production and reduce its dependence on oil and gas.

Notably, two separate investment analysts appear to have reached a similar conclusion in recent days. The team at Cavendish has initiated coverage of nine investment trusts in the sector, spanning both wind and solar, hitting a broadly optimistic note – if cautious and selective – with its analysis. 

Meanwhile, Kepler Trust Intelligence has published a fascinating discussion of the risks and opportunities in the sector; if anything, it is even more upbeat than Cavendish.

For investors in these funds, the allure is exposure to the contracts these trusts have signed, which offer long-term guaranteed income, often with inflation protection built in. To encourage investment in renewables, governments offer a range of mechanisms to provide operators with more certainty about returns and investors benefit from this certainty too.

That’s not to downplay all the risks. Interest rates are indeed a factor. There’s the potential for competition from other carbon-free technologies – notably nuclear energy. And there’s always a danger that government policy may move in a way that is unsupportive, particularly given the US-led backlash against the broader climate change agenda.

Still, many investors will feel that such anxieties are more than baked into valuations given where shares in renewable energy funds currently trade. At the very least, the income stream on offer from these vehicles looks highly attractive – the average investment trust in the sector currently sits on a yield of 10.5%. That’s better than you’d find anywhere in conventional asset classes; the average [insert link here: UK Equity Income investment trust yields less than 4% right now.

The bottom line? If the Iran crisis has taught us anything, it is that the imperative for renewable energy goes well beyond climate considerations, compelling though those are. Our energy independence and security depend on them too. The opportunity to buy these trusts at these very wide discounts seems unlikely to last for too long.