Solar fund that could guarantee you a sunny future
They’re one of the growing number of alternative assets investment trust savers are using to spread their risk
DIVERSIFICATION. Read any manual on personal finance and you will soon discover this word looms large in the lexicon of prudent investing. The argument is a simple one. In order to accumulate and preserve long-term wealth, you need to spread your money around – not put it all in one basket. So, not just in equities, but also cash, commercial property, bonds and gold. And not just with one fund manager (remember Woodford?) or one investment vehicle (remember Woodford Equity Income?) or one company’s shares (think Carillion or Thomas Cook).
No. Distribute it across a number of shares or in the case of funds, between investment management groups and individual funds.
Such diversification is usually mentioned in the context of portfolio construction and the pursuit of long-term investment return (capital gain). Yet it equally applies to those who invest with income generation firmly in their mind’s eye – maybe because they are retired and need top-up income or they are about to move from employment to a life of leisure.
So, it is just as important to ensure your investment income is derived from a multitude of sources. It shouldn’t just be dependent upon the crisp dividends paid by one blue-chip company – the likes of HSBC and GlaxoSmithKline – or one asset class such as bonds and equities. Diversify, diversify and diversify again.
Excitingly, but not I hasten to add without risk, a stream of newish ‘alternative assets’ paying investors attractive dividends has become available to income-hungry investors.
On the surface, they are dressed up to look like any other investment company or investment trust listed on the London Stock Exchange. So, they have shares that investors can easily buy and sell through most popular fund platforms – and in many cases they pay regular dividends, equivalent to anything between two and six per cent (even more in some cases) per annum.
But look under the bonnet and they are as different as an electric engine is to a petrol one. Instead of generating their income from stakes in listed businesses (the traditional way), they do it by investing in a variety of assets.
These range from solar panels situated in a desert in North Carolina; a wind farm off the Cumbrian coast; container-like storage batteries located across the UK; private businesses (private equity) and, more traditionally, UK commercial property. Even warehouses that are used to fulfil our voracious appetite for online shopping.
For the most part, they are illiquid assets (the bane of Woodford’s life), but reassuringly they are managed within a stock market listed investment trust where investors can always buy shares – or sell them.
So, illiquid assets, but tradeable shares. This is completely different from illiquid assets held in an open ended investment fund (think unit trusts) where if there is a run on the fund, the managers usually have no choice but to shut up shop and suspend dealings until such time they can sell some of the illiquid holdings and free up sufficient cash to pay exiting investors their money.
It’s what did for Woodford Equity Income, has forced the current suspension of dealings in M&G’s property fund, and is making the regulator twitchy.
In most cases, alternative assets held in an investment trust offer shareholders little chance of enjoying capital growth on their investment (the notable exception being private equity trusts). So they are not for everyone. But they do provide the opportunity to receive a steady income. Elixir as far as many retirees are concerned.
According to Annabel BrodieSmith, of the Association of Investment
Companies, such alternative assets are a growing component of the investment trust industry, accounting for more than 40 per cent of total assets. Last year, nearly 80 per cent of new money raised across the industry poured into this sector. She says: ‘The closed-ended structure of investment trusts means managers do not have to manage inflows or outflows of cash. As a result, they can take a longterm view of their portfolio. They are the right vehicle to hold alternative assets and some provide investors with juicy levels of income.
‘Of course, there are risks, but at a time when interest rates are low and company dividends are under pressure, they are worth considering.’
Last week, Wealth spoke to some of the managers who run such alternative asset investment companies (including one investing in UK commercial property) to get an idea of how they go about obtaining income for shareholders – and to financial advisers who are increasingly recommending these trusts. Some trusts are relatively new so have little track record. Tread carefully.
INVESTMENT company Gresham Energy Storage Fund makes its income from trading electricity stored in nine facilities that it owns – giant batteries housed in containers located across the country – for example, Cleator Moor in Cumbria and next to the Dartford Crossing that straddles Kent and Essex.
Last year, it is expected to have paid shareholders total dividends of 4.5p per share, on shares priced at £1.10 (the last quarterly dividend has yet to be declared). But this year, it is targeting a higher annual
Generating revenue from storing energy
dividend of 7p, paid in quarterly instalments, as more of its facilities become fully operational and another two get built.
Ben Guest, a director of the trust, describes the facilities as National Grid’s ‘wallet’. They store electricity when there is overgeneration countrywide – and then feed it into the National Grid if power demand suddenly rises or output drops. The fluctuations in energy supply, says Guest, are becoming more prevalent because of the country’s increasing reliance on solar and wind power.
The income it makes is from buying energy more cheaply than it sells it – and it employs sophisticated trading systems to ensure it maximises revenues. Income growth is possible, says Guest, as more storage batteries come on stream – or if it is able to cut operational costs or increase trading profits. The trust has proved popular with institutional investors, including investment manager Gravis Capital and charity fund manager CCLA.
But this is a double-edged sword as far as wannabe investors are concerned because it has driven the shares to a premium compared to the value of the trust’s assets. As a result, the annual dividend yield is a fraction under 2.3 per cent. A little underwhelming – and there is no guarantee the shares will continue to trade at a premium.
Income from North American solar panels
INVESTMENT company US Solar Fund listed on the London Stock Exchange in April last year. It generates shareholder income from the energy it generates from industrial scale solar panel plants that it operates in Utah and North Carolina – and that is then sold on to big American utility companies such as Duke Energy and Pacific Corp.
John Martin, who manages the trust from New York, says the company’s target annual dividend yield is 5.5 per cent, although this will only be achieved once all the plants are fully operational later this year.
Martin says the solar plants are all located in places that benefit from ‘stable sunshine levels’. Although there is the risk of destructive hurricanes, the units are insured against damage and loss of income. Some areas, such as Florida, are avoided because the hurricane risk is too high.
He says: ‘The reason why the trust is listed in the UK is because there is a strong appetite among investors to invest in renewables, more so than in the United States.’
For 2019, it has paid 0.7p per share in dividends with a further quarterly payment due of between 0.4p and 1p. The shares, priced at just below 80p, stand at a 9 per cent premium – so are expensive.
Building income from commercial property
EDISON Property Investment Company currently provides investors with a monthly income of 0.4792p a share, on shares priced at 87p. It works out at an annual dividend payment of 5.75p per share, equating to a dividend yield of 6.7 per cent.
The income is derived from the rents received on 16 commercial properties the trust holds – all in the UK and primarily comprising out-of-town retail parks.
Although manager Calum Bruce accepts UK commercial property is ‘challenged’, especially in the retail sector as a result of the slow ‘death’ of the high street and growth in internet shopping, he insists the asset class can still provide investors with an attractive income.
As a manager, Bruce says the key is to buy property assets that can be improved through ‘intensive management’ – in other words, to generate more rent that can then be passed on to shareholders.
This, he does, in various ways. For example, by occasionally shifting tenants around so that retailers in growth mode – the likes of ‘variety’ retailer B&M – can be best accommodated, or by improving through traffic at specific out-of- town retail parks by getting companies such as Costa Coffee to run popular drivethrough coffee shops.
Bruce says: ‘In the last couple of years, we’ve installed Costa Coffee shops on our retail parks in Wrexham and Sunderland, while providing B&M with bigger retail units in Hull and Barnsley – and the opportunity to take space on the Abbey Retail Park in Daventry. All the time, we’re looking at ways of improving the trust’s income and its quality.’
According to the latest statistics from financial scrutineer Dun & Bradstreet, 89 per cent of the trust’s tenants have ‘little or a lower than average’ risk of failure. Figures that Bruce says should reassure shareholders.