At the same time, interest rates are at levels that we believe are at or near the peak, so the pressure that has caused a significant de-rating in the sector should begin to abate.
We believe there is a significant opportunity across the trusts we hold. One such example is Greencoat UK Wind.
Due to its strong cash flow, the trust, which is one of the UK’s largest wind farm operators, has remained resilient:
- Plans to pay a 10p dividend in 2024 on a share price of 138p. This dividend has a coverage ratio of 2.1 times.
- Cash flow is inflation linked to energy prices.
- Excellent if you are targeting income or growth, with returns significantly above cash or bonds.
The renewable and infrastructure sector remains highly attractive. From trading at a premium to NAV, the sector now trades at a substantial discount, meaning investors will benefit from both increases in the value of the investment and these discounts closing. Patience is the key.
Managing discounts
A unique feature of investment trusts is that they come with their own independent board of directors, and can take action to reduce if it gets too wide.
At the end of March, the board of the £14bn Scottish Mortgage Investment Trust announced a £1bn buyback (the largest ever for an investment trust) to prop up its share price, which is currently at a 13 per cent discount to its NAV.
In a signal that international investors are taking advantage of the value on offer, Elliot Associates has acquired a 5 per cent stake. Elliott Associates is known for being one of the largest and most successful activist investors in the world, with a track record of driving significant improvements in the companies it invests in.
Regulatory uncertainty
Another driver of wider discounts has been a change in the guidance about cost disclosures around holdings in investment trusts. The sector has been undermined in recent years by charges disclosure rules being misapplied to investment trusts, forcing these companies to exaggerate the costs of holding their shared.
The good news is that the government has asked the Financial Conduct Authority to resolve these issues. A reform of the requirements to disclose costs could increase demand for investment trusts, potentially helping to narrow discounts in the sector.
On the cusp of a recovery?
Similar periods of historically wide discounts – after the bursting of the dot.com bubble, in the wake of the financial crisis, and in the early days of the Covid pandemic – led to subsequent periods of outperformance by investment trusts.
As with any investment, the benefits need to be considered in the context of the risks. We continue to engage with management teams and investment trust boards on these topics.
However, we are firm believers that investment trusts with a sustainable focus provide a genuine diversification benefit to investor portfolios.
Andrew Rees is investment manager at EQ Investors
