Price vs value
One of the most pervasive and unhelpful arguments when discussing the value of investment trusts often comes down to a perception that they are high cost.
Investment trusts are often wrongly perceived as expensive relative to open-ended mutual funds. This is partially driven by the Financial Conduct Authority’s cost disclosure regime being applied to investment trusts.
The regime, which is a retained EU regulation, requires investment trusts to report costs in the same format as unlisted open-ended funds. This fails to recognise that for an investor the cost of investing in a trust is its share price.
This means the ongoing aggregate costs of managing investment trusts can artificially elevate what the actual cost of investing in these vehicles is.
In other words, the lower share prices found in the renewable energy trust space are in fact an indication their costs for investors are low on an internal rate of return basis.
Looking forward
The case for the sector remains unchanged despite trading at widening discounts to its long-term average; as such, today could be an attractive entry point.
We believe the share price discounts in the renewable energy investment trust sector are unlikely to continue for the long term, and there are potentially a number of tailwinds that could drive this rerating. This is for three main reasons.
The first is that we believe the underlying popularity of these assets is likely to continue around the world as consumer demand continues to rise and governments continue to reinforce their commitments to the energy transition and getting to net zero.
Second, as we pass through this super-election year and witness a steady increase in political stability, we can expect a reduction to the risk premium associated with the sector and a boost to investor confidence.
Finally, investment trusts focused on renewable assets have traditionally been a success with UK retail investors as they give individuals the opportunity to invest in energy projects, democratising an area that would otherwise be the domain of institutional investors.
Large investors rightly put a lot of weight on the idea of diversification, particularly amid market volatility. In fact, diversification is often described as the only free lunch in investing.
For retail investors, renewable investment trusts represent one of the only access points to private assets, with strong, inflation-hedged contracted revenue.
Given their cost-effective, shareholder friendly, income-generating qualities, it will not be long before investors start to recognise their true value and compelling risk-adjusted returns once again.
Navin Chauhan is a managing partner and chief commercial officer at Victory Hill Capital Partners
