The income-generating trust sector trading at ‘ridiculous discounts’

Infrastructure trusts are trading at steep discounts, but could be overdue a re-rating


Trusts investing in renewables and infrastructure were high in demand a few years ago when the runway for growth was seemingly endless, but it has been quite a different story over the past couple of years.

Five years ago, infrastructure trusts were trading on an average premium to their net asset value of 3.9% – today, shares in those same trusts are selling at a 30% discount.

Valuations of investment companies have sunk below their net asset values (NAV) across the board, but those investing in renewables and infrastructure have fallen particularly sharply, dropping almost three times as far as the 11% discount on the average trust.

However, the investment case for renewables and infrastructure remains the same despite their widening discounts, potentially providing investors with an appealing entry point, according to James Carthew, co-founder and head of investment company research at QuotedData.

“There just doesn’t seem to be a floor to it and some of them are going out to ridiculous discounts,” he said. “People are just not responding to logic there.”

Indeed, the main appeal of renewable and infrastructure trusts – their high levels of income over the long term – remains unchanged despite the widespread selloff, Carthew added. These portfolios invest in multi-year projects that provide consistent streams of revenue, with trusts such as Harmony Energy Income and NextEnergy Solar offering yields as high as 15.4% and 10.8%.

“Everything that is happening with infrastructure and renewables [trusts] annoys me, because a bunch of people invested in it for its long-term income stream, so they shouldn’t be trading it the way that they have been,” Carthew said.

“The way people have been trading in and out of it over the past year doesn’t make sense. You’ve locked in income for the next 20 to 30 years – if you were happy with that when you bought it, why don’t you just stick with it?

“You still have the income you paid for, so are you really fussed about the short-term fluctuation in the NAV if you’re a long-term investor?”

This is something that Ed Simpson also noticed in his role as head of energy and infrastructure at Gravis. He said many of the investors who bought renewable and infrastructure trusts for income migrated into fixed income assets as their yields rose sharply last year.

“The yields on renewables have become relatively less attractive, so people have sold out and caused a large portion of those discounts for shares,” Simpson explained. “People have taken a slightly lower yield through government debt and other fixed income, which I think has been a big challenge for share prices – I would argue that this has been overdone.

“Fundamentally, renewables are still needed. There’s a massive need to build out a huge amount more renewable infrastructure in order to meet any of the main parties’ commitments to reaching net zero. So there’s a strong business case for this financially and sustainably as well.”

There is still a high volume of money being invested into renewable infrastructure over the next few decades. The McKinsey Global Institute estimated that governments would collectively need to invest $9.2trn (£6.8trn) a year to reach net zero by 2050.

But investors may not have to wait too long to see the share prices of investment trusts in the sector return closer to their NAVs. Matthew Read, senior research analyst and head of production at QuotedData, said improving monetary conditions could lead their deep discounts to narrow significantly.

He expects broader infrastructure trusts with exposure to a range of assets in the sector to move first, with portfolios specialising in renewables alone trailing behind.

“People seem to be more comfortable with infrastructure than just renewables,” Read added. “I think infrastructure trusts are just better understood.”

Some of the biggest renewables trusts such as NextEnergy Solar, Bluefield Solar Income and Greencoat UK Wind (collectively holding £4.3bn in assets under management) could be some of the first to see their discounted shares undergo a re-rating.

Read said that buying into any of their high long-term yields at such steep discounts makes it “hard to see where you could go wrong” by investing in them.

NextEnergy Solar, Bluefield Solar Income and Greencoat UK Wind have fallen to discounts of 29.9%, 23.6% and 15.3%.

These big players in the renewables space may be well positioned for a rebound, but some smaller trusts are also overdue a re-rating, especially Pantheon Infrastructure (PINT).

Read said investors lost some confidence in the £376m trust during the downturn because of its relative infancy (having launched in 2021), but it could come swinging back from its 20.8% discount once markets appreciate its potential.

He said: “It is not small, but in the scale of infrastructure trusts, it is comparatively small. I think people mostly forget that the depth of expertise at Pantheon is huge.

“The management team can run this standing on their head, so imagine if it delivers on a few things, interest rates come down, and it goes to asset value – it can start growing the trust again from there and absolutely take off.”

Similarly, the VH Global Sustainable Energy Opportunities and Octopus Renewables Infrastructure trusts are two relatively newer and smaller portfolios that William Heathcoat Amory, managing partner at Kepler, pointed out as having overly inflated discounts. Shares in the trusts are trading 35.4% and 22.6% below their NAVs respectively.

Even if investors do not see an immediate reversal of those discounts in the near-term, these trusts are likely to give shareholders double digit NAV returns from this starting point, Heathcoat Amory added.

“The evident climate and energy security benefits of renewables have resulted in a favourable policy backdrop, with governments worldwide committed to boosting net zero investment,” he said.

“While it’s always possible to find short-term headlines about various governments failing to meet targets or revising spending plans, overall the backdrop is constructive, and long-term trends remain strong.”