Should you buy energy infrastructure investment trusts?
Renewable energy infrastructure investment trusts look cheap, and one in particular stands out
The listed infrastructure investment trust sector offers some extraordinary bargains. Infrastructure investment trusts are trading at an average discount to net asset value (NAV) of 22%. Renewable energy infrastructure investment trusts are trading at an average discount of closer to 30%. The reason for these discounts is uncertainty. NAVs are based on estimated cash flows from the assets these trusts own, discounted back at an appropriate rate.
Discount rates are tied to interest rates and the higher the discount rate, the lower the present value of future cash flows, and vice versa. However, these values are open to interpretation, and at present the market doesn’t appear to believe the values the trusts are reporting – hence the wide discounts to NAVs across the board.
In some cases, I think the market is right to be sceptical but, in others, there is clear evidence that investors are being too pessimistic when it comes to asset values. Bluefield Solar Income Fund (LSE: BSIF) appears to be a classic example. The company boasts a portfolio of solar and wind assets, comprising a total of 776 megawatts (MW) of solar and 58MW of onshore wind capacity, with its assets located in the UK. A current dividend yield of 8.1% is on offer and the payout is covered twice by earnings per share.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Bluefield Solar: a shining energy infrastructure investment trust
There are two technical reasons why investors might be put off from holding the trust. One is regulatory. Last month 360 Fund Insight, which provides assessments of value for investment platform AJ Bell, found that Bluefield Solar is not appropriate for private investors because it has “worrisome” borrowing levels and an “aggressive” dividend policy.
The other reason is investors’ appetite for risk. As Armstrong notes, “there isn’t the appetite for new investments” in the infrastructure investment trust sector. In a market where investors can earn 5.25% risk-free and have been fleeing from all UK-listed equities for more than two years, these trusts can’t even get a look-in from investors.
Still, there is an excellent opportunity here for investors willing to be patient and go against the herd. Based on the discount and the current dividend yield, investors could earn a very healthy return if the discount closes. That could take some time, but in the meantime the firm is buying back stock, and with the private market still willing to pay up for solar assets, sooner or later, if Bluefield keeps booking record earnings and returning more cash to its investors, a private buyer is likely to come knocking.
Risks associated with this energy infrastructure investment trust
There are two technical reasons why investors might be put off from holding the trust. One is regulatory. Last month 360 Fund Insight, which provides assessments of value for investment platform AJ Bell, found that Bluefield Solar is not appropriate for private investors because it has “worrisome” borrowing levels and an “aggressive” dividend policy.
The other reason is investors’ appetite for risk. As Armstrong notes, “there isn’t the appetite for new investments” in the infrastructure investment trust sector. In a market where investors can earn 5.25% risk-free and have been fleeing from all UK-listed equities for more than two years, these trusts can’t even get a look-in from investors.
Still, there is an excellent opportunity here for investors willing to be patient and go against the herd. Based on the discount and the current dividend yield, investors could earn a very healthy return if the discount closes. That could take some time, but in the meantime the firm is buying back stock and with the private market still willing to pay up for solar assets, sooner or later, if Bluefield keeps booking record earnings and returning more cash to its investors, a private buyer is likely to come knocking.
This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
Rupert is the former deputy digital editor of MoneyWeek. He's an active investor and has always been fascinated by the world of business and investing. His style has been heavily influenced by US investors Warren Buffett and Philip Carret. He is always looking for high-quality growth opportunities trading at a reasonable price, preferring cash generative businesses with strong balance sheets over blue-sky growth stocks.
Rupert has written for many UK and international publications including the Motley Fool, Gurufocus and ValueWalk, aimed at a range of readers; from the first timers to experienced high-net-worth individuals. Rupert has also founded and managed several businesses, including the New York-based hedge fund newsletter, Hidden Value Stocks. He has written over 20 ebooks and appeared as an expert commentator on the BBC World Service.
-
A junior ISA could turn your child’s pocket money into thousands of pounds
Persuading your child to put their pocket money in a junior ISA might be difficult, but the pennies could quickly grow into pounds – and teach them a valuable lesson about money
By Katie Williams Published
-
Cost of Christmas dinner jumps 6.5% as grocery price inflation rises again
The average Christmas dinner for four now costs £32.57 as grocery price inflation increases - but what does it mean for interest rates?
By Chris Newlands Published
-
Should you buy JPMorgan's top emerging market trust?
The JPMorgan Emerging Markets Trust fund has outperformed its benchmark over the long term and offers good value
By Max King Published
-
Two investment trusts riding the AI boom
Remain invested in investment trusts despite high valuations, as computing breakthroughs are likely to change the world
By Max King Published
-
Investment trusts could benefit from more optimism
Give yourself an edge with investment trusts. Finding winning stocks is no mean feat.
By Max King Published
-
What does the future hold for investment trusts?
The investment trust sector is consolidating; for the small, illiquid players the future looks bleak
By Rupert Hargreaves Published
-
An overlooked Japanese investment trust to invest in
This Japanese investment trust focuses on family-controlled firms, cheap investment trusts and Japan
By Max King Published
-
Is Brevan Howard Macro a good investment?
Holding Brevan Howard, a world-leading vehicle through an investment trust, offers diversification on the cheap
By Rupert Hargreaves Published
-
A fairer deal for investment trusts
New rules on how investment trusts report costs should ditch the idea that investors only need to look at one number
By Cris Sholto Heaton Published
-
After Priips changes, investment trusts are due a rerating
Heavy-handed rules governing fees, which put investment trust companies at a disadvantage, are to go.
By Rupert Hargreaves Published