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A solution to low rates? Renewables see investor influx

A solution to low rates? Renewables see investor influx

Investors have been shifting towards investment trusts specialising in renewable energy since the EU referendum, as a combination of economic factors boost the sector’s utility.

The strong pick-up in interest for renewables trusts has pushed the average premium for the sector from 1.9 per cent at the end of May to 7.6 per cent, according to the Association of Investment Companies (AIC).

The average discount for the AIC universe as a whole moved from 5.8 per cent to 4.8 per cent over the same period.

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Though Numis Securities has noted some trusts struggled to meet funding targets earlier in the year, funds such as NextEnergy Solar and John Laing Environmental have issued shares in recent weeks to take advantage of piqued demand.

Charles Cade, head of investment companies research at Numis, said demand for renewables could be seen “across the board” but with particular focus from multi-asset strategies and multi-managers.

Analysts predicted the sector would continue to see demand given its income characteristic. Compared with traditional strategies, renewables benefit from low gilt yields, weak sterling and near-zero interest rates.

Mr Cade said the reason Brexit led to increased demand was mainly due to interest rates staying low – this affects yield in traditional spaces but provides cheaper funding for renewables projects.

“As a long-term income play, renewables funds indirectly benefit from a fall in gilt yields, as well as from lower base rates,” Mr Cade said.

A weak sterling has also aided the sector. The drop in currency is expected to fuel inflation, affecting traditional energy sources. In addition, some companies offer inflation-linked dividend payments.

Kieran Drake, researcher at Winterflood Securities, said: “Renewables funds have targets to increase dividends with inflation, which is expected to pick up post-Brexit. They also trade on small premiums and have high dividend yields.”

According to Monica Tepes, director of investment companies research at Cantor Fitzgerald, the Brexit effect has combined with a rebound in global commodity prices to boost retail interest in the sector.

She said two years of falling electricity prices had been the largest headwind for the sector.

“Electricity prices rebounded in the second quarter of this year and continue to be on an upward trend,” Ms Tepes added.

Tilney Bestinvest managing director Jason Hollands pointed to Bluefield Solar Income fund as one for investors to consider. He said it was trading on a “modest” 2.6 per cent premium while yielding 6.9 per cent.

The recent series of benefiting factors has combined with an underlying need for income, according to analysts. Mr Cade said the funds’ long-term income streams via lengthy contracts made them ideal for pension investing.

“If you want something with a steady income, then that’s why they’re buying [the trusts]: high-running yield and predictable returns,” he said.

However, Charles Murphy, investment funds analyst at Panmure Gordon, sounded a note of caution for those flooding into the sector. “I prefer funds with low leverage or a high proportion of fixed revenue streams. My key concern is the revenues are a mixture of power prices with subsidy – the more leverage you use the more the income stream to the investor gets dominated by the power price.”