Clean energy funds, once a favourite in the investment trust landscape, are poised for a resurgence as lower interest rates reignite investor interest.
After years of high premiums and booming demand driven by environmental, social, and governance (ESG) concerns, the sector has faced headwinds from rising rates and easing power prices. However, with the Bank of England recently lowering interest rates for the first time in over four years, and further cuts anticipated in 2024, optimism is returning.
According to data from the Association of Investment Trusts, clean energy funds traded at significant premiums to their net asset values (NAV) as recently as 2020. For example, Greencoat UK Wind, the largest clean power investment trust, raised over £1 billion in equity during 2020 and 2021, almost a third of its stock market value. But today, the fund and its peers are trading at discounts, reflecting the broader market’s retreat from the £15.5 billion sector amid higher interest rates and softer energy prices.
James Wallace, an analyst at Winterflood, believes the recent rate cuts could help narrow these discounts, though the impact might take time to materialise fully. “We think that these interest rate cuts will narrow this gap, at least somewhat in terms of discounts, because of the lower required returns demanded by these investors,” he said. However, Wallace cautioned that substantial cuts—potentially up to 75 basis points—may be needed to see a meaningful impact on valuations.
Still, questions remain about whether green energy funds can reclaim the high premiums of the past without a return to the ultra-low interest rates seen pre-2020. Ben Newell, an analyst at Investec, noted, “It’s feasible that these companies trade at or around NAV, but unless you’ve got the rates we saw pre-2020, they’re not going to trade on 10 to 20 per cent premiums to book value.”
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