Since listing in 2013, Greencoat UK Wind (LSE: UKW) has grown to become one of the UK’s largest investment trusts. At one point, its net asset value (NAV) reached almost £4 billion.
Yet the trust has generated mediocre long-term returns for investors: the NAV total return has been 5.7% per annum (pa) since 2013, while the share price total return has been 6.6% pa. Over five years, results have been much worse, with a NAV total return of 1.8% pa.
In comparison, City of London (LSE: CTY), a straightforward equity-income trust, has produced 15% pa over the past five years, 7.8% pa over ten years and 9.1% pa over 15 years. Greencoat even lags cash funds in recent years: Royal London Short Term Money Market Fund has returned 2.7% pa over five years.
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Discounting the future
Granted, Greencoat is an alternative income trust designed to provide investors with diversification from stocks, bonds and cash. So, it’s not directly comparable to these two funds.
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Still, to get this income diversification, investors have had to sacrifice their capital: if you ignore dividends received, the trust’s return over the past decade is below zero. That reflects its declining NAV, which is a function of the way that renewables trusts value their assets and the factors that have been working against them.
The value of Greencoat assets is based on the present value of projected future cash flows generated by its portfolio of wind farms. These cash flows are determined by the volume of electricity generated and the price at which it is sold. The present value of them is determined by the discount rate used to put them into today’s terms.
This discount rate reflects the market’s view on the long-term risks of Greencoat’s cash flows, but is also highly sensitive to prevailing interest rates. The discount rate is highly subjective. For example, in a recent report on Greencoat, analysts at Winterflood calculated a NAV 13% below the trust’s published value. Why? “We believe around half of this gap relates to the higher discount rate we have applied to merchant power revenues.”
Many other assumptions also go into these valuations and changing them can have significant consequences. If the power price forecasts used by Renewables Infrastructure Group (LSE: TRIG) were plugged into Winterflood’s model for Greencoat, it would have a further impact of around 9% on the NAV, say the analysts.
That doesn’t mean that either UKW or TRIG is more likely to be right about power price forecasts, and TRIG has its own issues. At its half-year results, it warned that dividend cover would be tight following a drop in power prices and wind generation.
A sector-wide problem
This sums up a broader problem across the renewables trusts: valuations are far more volatile than investors might expect. Take Greencoat Renewables (LSE: GRP), which invests in euro-denominated assets. At the end of June, it cut its NAV by 8.9%, due to lower power prices and estimated wind generation.
As a result of these changes, the management team estimates full-year dividend cover will be 1.3 times, down from the 1.9 times estimated at the end of 2024.
While these three trusts focus mostly on wind, similar issues affect other funds in the sector. Bluefield Solar Income Fund (LSE: BSIF) downgraded its NAV by nearly 5% at its half-year, due to lower forecast power prices for the period from 2027 to 2030. On average, UK-focused peers saw a 2.3% decline in their NAV in the second quarter due to changes in power forecasts, while EU-focused peers dropped 1.92%.
These large changes show just how subjective NAV can be and how easily the numbers can change. Investors shouldn’t rely on the weather to provide positive and steady returns.
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