A renewed focus on fossil fuel alternatives has helped translate into a good run for the renewable energy infrastructure trusts in recent months. While many equities (and other assets) have been in freefall, trusts in the Association of Investment Companies’ Renewable Energy Infrastructure sector have largely posted some decent share price returns so far in 2022. But of course there’s a catch, with such trusts now looking pricey relative to their own recent history.
Winterflood data from 25 April shows that a good number of trusts sat on much bigger share price premiums to net asset value (NAV) than the 12-month average. Take Downing Renewables & Infrastructure (DORE), which commanded a premium of 8.1 per cent versus a 12-month average of just 1.1 per cent, or Ecofin US Renewables Infrastructure (RNEW) on 8.6 per cent versus a 12-month average of 1.8 per cent. It’s a similar story for other broad renewable names like VH Global Sustainable Energy Opportunities (GSEO) and arguably more extreme for a handful of more targeted plays. Take the 36.1 per cent premium on Gresham House Energy Storage (GRID) versus a 15.5 per cent 12-month average, or the Greencoat UK Wind (UKW) premium of 16.8 per cent against an average of 9.3 per cent over the previous year.
This is arguably part of the game when it comes to all manner of infrastructure, given the income they promise and a perceived low correlation to the likes of equities. In the generalist infrastructure space, for example, double-digit premiums are stubbornly persistent on names such as BBGI Global Infrastructure (BBGI) and HICL Infrastructure (HICL). Which brings us back to the usual question of what exactly is justified in the price.
Premiums are uncomfortable to accept, and certainly leave you exposed to a turn in sentiment, one reason some investors simply won’t accept paying up in the first place. But the infrastructure trusts have demonstrated that funds can still do their job while commanding hefty prices, and one metric suggests some maintain a degree of appeal.
Here, I’m talking about yield. Last year we discussed the fact that an attractive yield may help to justify a premium, and it’s notable that some still look enticing in the renewable energy infrastructure space. To take the trusts mentioned above, AIC data from 25 April shows that the Downing fund came with a dividend yield of 4.3 per cent, with similar from VH Global Sustainable Energy Opportunities. Gresham House Energy Storage offered a dividend yield of 4.7 per cent, while Greencoat UK Wind came with a 5.1 per cent yield. Of the renewable names mentioned it’s the Ecofin trust that lagged, with a dividend yield of 3 per cent.
That’s a pretty good showing, and still competitive versus what’s on offer from the mainstream equity markets. However, it’s certainly worth keeping an eye on the potential for yield compression if we do see further price gains. That’s something we’ve witnessed in other niches of the trust space, with names like logistics play Tritax Big Box Reit (BBOX) offering a lower yield over time (it recently came to 2.7 per cent). It’s also worth thinking carefully about those newer names that already trade on premiums but have yet to pay a dividend, possibly because they are still investing their IPO proceeds.
