Recycle waste into profit

Since launch in July 2008 the fund has returned more than 44 per cent via its investments in UK recycling facilities. These include industrial facilities for waste recycling, treatment and energy generation. Recycling, rather than sending rubbish to land fill, is a growth area because the Landfill Tax Escalator was set at an £8 annual increase per tonne in April 2008. It is due to hit £72 per tonne in April 2012, making it increasingly expensive for local authorities to throw rubbish in a giant pit.

New Earth Solutions Recycling Facilities Investment Fund has five operational facilities with a combined potential processing capacity of nearly 425,000 tonnes per annum (tpa). Another facility in the Scottish Borders is due to open in 2012. The fund also has planning permission for several other sites in England, which will be developed if it secures waste contracts for them.

The fund invests in waste treatment facilities on a joint-venture basis with the New Earth Group, an established provider of waste treatment facilities, which is developing complementary operations in the renewable energy sector. The fund's manager is Isle of Man based Premier Group.

The schemes in which the fund invests are managed by New Earth Group, which targets developments with freehold land or long leasehold interests, property and plant assets, and waste supply and energy sale contracts.

The fund's returns are derived principally from:

■ Rent plus a share of gate fees;

■ Electricity and heat generation revenues, if applicable.

In addition, no corporation tax is payable by the joint venture companies for nine to 10 years, and the fund benefits from the gradual repayment of senior debt. And much of the income is indexed to Retail Prices Index (RPI) inflation. The fund also gets income from its shares in New Earth Group and interest from its cash holdings.

Around five to seven years after establishing a facility the fund may consider selling it on, and might list the investment fund business on a public market.

There is a fairly remote risk that the government will backtrack on its taxation of land fill. Other risk factors are more pertinent. The fund is at risk if New Earth Group became insolvent, and there is development and operational risk inherent in building and operating the facilities, although New Earth Solutions tries to minimise this by not building a facility until it has local authority funding and planning permission. Contracts with the local authorities are usually for at least five years.

The fund is not regulated by the Financial Services Authority (FSA) so UK investors are not covered by the Financial Services Compensation Scheme (FSCS). And it's not cheap: the total expense ratio (TER) is 2.5 per cent, reflecting its specialist nature, and it can charge a performance fee, although this fee has not been triggered to date.

There is also an exit penalty in the first five years, starting at 8 per cent and reducing by 0.4 per cent per quarter. You can make one penalty-free withdrawal of up to 5 per cent of your original investment each year. Withdrawals can only be made once a month, rather than every day as is the case with UK unit trusts and open-ended investment companies (Oeics).

The minimum investment for the New Earth Sub-Fund is £10,000, or £5,000 if you invest via insurance bonds. It is also available via platforms and self-invested personal pensions (Sipps), but you have to be categorised as a high net worth or sophisticated investor to invest.

Clearly, its relatively high costs, inflexibility and high minimum investment levels mean this fund won't be suitable for all investors. But if you're looking to introduce a small element of diversification into a predominantly equity-focused portfolio, it offers index-linked revenues in a growing industry, and has so far generated good returns. Buy.

Bonds, platforms and Sipps via which you can buy New Earth Solutions Recycling Facilities

Source: New Earth Funds

Performance data as at October 2011.

Fund holdings as at October 2011.