Should investment trust buyers be looking at active ETFs as well?

There have been no new investment trust IPOs in two years, but many active ETFs are emerging. This week, Janus Henderson launched a new Japanese equities active ETF, which could have been an investment trust. Active ETFs are booming in the US and launching regularly in Europe. We explore the key differences and similarities.

By David Stevenson

The whole investment trust sector has to fight for new money inflows, but barely a week goes by without news of some new active exchange-traded fund launch. Just this week, for instance, came news that Janus Henderson – a major player in the investment trust space – announced the launch of its first active ETF in Europe: the Janus Henderson Tabula Japan High Conviction Equity UCITS ETF (JCPN). According to the manager “the fund will adopt a high conviction approach and invest in an actively managed all-cap concentrated portfolio of 20 to 30 holdings, providing exposure to companies that are set to benefit from structural themes and trends in the Japanese Equity market, and showcasing the best of Janus Henderson’s stock selection skills. The launch of this active ETF represents an important milestone for Janus Henderson, allowing the firm to cater to client demand globally for its investment strategies to include a UCITS ETF wrapper; and builds upon the firm’s extremely successful active ETF proposition in the US where it is fourth largest provider of actively managed fixed income ETFs.”

That last sentence should be of particular concern to investment trust fans – active ETFs have been growing exponentially in the US, with many big fund managers getting behind the space with huge marketing pushes. Remember that the US also has a vibrant closed-end fund space that echoes the UK investment trust sector. What should be especially concerning is that the Janus Henderson Japanese fund could have been an investment trust, but the manager has chosen to use an active ETT format.

This news prompts an important question: Are active ETFs and investment trusts very different structures, or are there many similarities? Put another way, are active ETFs and investment trusts fighting for the same investor attention? 

Many fund managers publish useful guides to ETFs to help explain the similarities and differences. I’d highlight this one from AXA and this one from JPMorgan as helpful. In this article, I want to simplify the explanation so that investors can make up their own minds.

The first point is that an active ETF differs from a traditional passive ETF in one very important way. In the latter, a fund manager identifies an index, such as the FTSE 100 or the S&P 500 and then replicates or tracks that index passively. If Nvidia suddenly doubles as a holding in the S&P 500 because of rocketing valuations, then the passive fund will track that change. 

An active ETF might still have an index or benchmark, but its explicit focus is on actively beating the index through its portfolio of active stock or bond picks. In a sense, this is exactly what an actively managed investment trust also seeks to do – if we look at Alliance Witan Trust, it too chooses to reference an index, a global equities index, and then aims to beat that index. So, there is an obvious similarity in investment strategy between an active ETF and an investment trust.  Another similarity is that both investment trusts and ETFs are listed funds, i.e. they have a ticker with a real-time quote for buying and selling shares all day, every day (when the markets are open). That makes them very different from unit trusts, which only issue an end-of-the-day price for underlying holdings which then triggers any buy or sell orders. 

However, the similarities between an ETF and an investment trust stop there. Both a passive ETF and an active ETF are open-end fund vehicles (like unit trusts), which means the manager can issue shares regularly – in fact, daily or even in real-time if they so choose. By contrast, Investment trusts are closed-end vehicles, which means they start with a fixed issuance of shares. That doesn’t mean that the fund can’t issue new shares via a placing programme for instance, or buy back shares regularly, as many investment trusts are doing – but they don’t have quite the same flexibility to change the amount of shares in issue.

The next big difference is the passive and active creation and redemption process in ETFs. This mechanism allows the ETF to trade at close to, or exactly at, the shares’ net asset value. In this complex process, the fund manager issues shares based on the portfolio holdings, which are fully transparent in real-time (in the US there are semi-transparent ETFs but let us ignore that for now). This list of holdings is available to a market-making authorised participant firm, usually a financial intermediary, which can then look at the index and compare it to the fund holdings. If the fund’s assets are worth, say, £100m, but the value of the fund is only £95m, for argument’s sake, the AP can buy the shares and then exchange these shares for a basket of securities  ‘in kind’ , or vice versa.  

The AP can create and redeem shares based on an agreement with the fund issuer. If there is a shortage of ETF shares in the market, the AP can create more ETF shares, and again, this works in reverse as well – they can redeem shares. It all sounds complicated, but the key impact is that there should be a close match between the fund’s net asset value and the ETF share price. This doesn’t mean that an ETF can never trade at a discount to its NAV (or premium), which does happen in some instances with some exotic investments, but for the vast majority of the time, there should be no discount or premium for an ETF. Crucially, this mechanism works for active ETFs as well – instead of an index, we have a model portfolio or basket of shares equivalent to the fund holdings. 

Investment trusts operate in a very different way. Discounts are common in the closed-end fund space, and although managers and boards can use all sorts of mechanisms to close the gap (buybacks and tenders, for instance), many of these don’t move the discount appreciably. 

Another key difference between trusts and active ETFs worth noting is cost and structure. It’s very easy to create an ETF because there is no board of non-executive directors or NEDs, and the fund structure is simplified and streamlined based on a common set of European-wide rules set mainly by Ireland and its central bank under the regional UCITs framework. No sponsoring broker officially launches or IPOs the fund as an adviser, which also helps cut costs. Crucially, suppose you are an active fund manager. In that case, you can probably issue an ETF with just a few million pounds in assets under management and then slowly build it up in scale – most analysts reckon break even for an ETF is probably somewhere between £10m and £50m. And that’s true even though most ETFs charge less than 0.50% per annum in total expenses which is much lower than the equivalent investment trust. The Janus Henderson Japan equities fund, for instance, charges 0.49%. In contrast, most Japanese investment trusts charge between 0.50% and 1% – according to Numis, the average large-cap Japanese equities fund charges 0.81%, while the average small-cap Japanese equities fund charges 1.1%. 

Now, its important to step back at this point and say that the extra structures in place with an investment trust may cost more – you need to pay those directors and broker advisers – but they also provide real protection for investors. If the fund manager underperforms, the board can fire them and find a new manager. That isn’t the case with an active ETF. A closed-end fund structure also provides permanence – this is a long-term commitment of capital unless the fund decides to wind up. With active ETFs, you can start with a few million pounds in assets under management and then remain under the radar for years, not attracting much capital or research interest. Many active ETFs close in the US because they fail to attract much interest and the manager can just decide to close down whenever it suits them – although you will receive your net asset value per share back when the fund closes. 

I’d also argue that the obvious advantage of active ETFs over investment trusts – the discount or lack of with an ETF – can be seen in two ways. Sure, we should expect most active ETFs to trade at their NAV but there is an advantage to buying an investment trust at a discount – you’re buying a collection of hopefully valuable assets at a discount to their ‘real’ (we hope) value i.e. a catalyst emerges that closes the discount. That value opportunity is not good news to the seller of the deeply discounted investment trust, but discounts are an essential feature of the investment trust proposition. 

As for active ETFs, they can serve a slightly different need. They’re great for fund managers looking to sell a fund across Europe quickly and easily. The fund managers can also easily set up different classes of shares for different currencies and even introduce hedged classes of shares – the same goes for accumulating and distributing classes of shares.  For investors, active ETFs can work very well for niche ideas or strategies that might never attract huge sums of capital, i.e. as investment trusts get bigger and more liquid, not all investment ideas will attract hundreds of millions in capital, whereas an active ETF might work well. 

One last point: The nature of the assets. Many active ETFs focus on underlying assets such as equities or bonds that are easily traded, i.e. there is real liquidity in the underlying assets. That underlying liquidity allows the authorised participants to ensure the share price equates to the NAV. Investing in illiquid assets such as private assets (real estate, renewables, or infrastructure) becomes much more challenging. It’s one thing to trade in Japanese equities in real-time (by the way, not always as easy as you think), quite another to sell a wind farm or a stake in a private business. Active ETFs are unlikely, for now, to be very common in these private asset markets, although some managers are pioneering ways of accessing private markets with an index-like structure of more liquid assets. Alternative assets will almost certainly remain a key selling point for the closed-end investment trust sector, giving investors access to less than liquid asset classes usually reserved only for large institutional investors. 

The Results Round-Up: The week’s investment trust results

JPMorgan Global Emerging Market Inc (JEMI) matches the index; Intl Biotechnology (IBT) posts a 15.9% return; BlackRock Greater Europe (BRGE) +16.4%; Henderson Far East Income (HFEL) can’t match that but manages 11.9%; Fidelity Special Values (FSV), the standout up +24.1%; while Scottish Mortgage’s (SMT) half-year numbers can’t add to its long-term record of outperformance.

By Frank Buhagiar

JPMorgan Global Emerging Markets Income’s (JEMI) second half turnaround

JEMI’s net asset value (NAV) total return of +6.3% for the full year almost exactly in line with the MSCI Emerging Markets Index’s +6.4%. That means the second half of the year saw quite a turnaround in performance as the fund was nursing a 5% loss at the half-year stage. Over the five years to end of July 2024, the fund however has the upper hand and by some margin: the +25.3% NAV total return almost double the benchmark’s +12.7%. Meanwhile, the cumulative return on net assets over 10 years was +87.5% compared to +70.3% for the benchmark.

The strong track record serves as a thumbs up for the fund’s stock selection process. As the investment managers explain “Our principal focus is the same as it has been since the inception of the Company: we seek out companies able to produce attractive returns on equity, generate healthy free cash flow and pay shareholders reliable dividends. By identifying stocks with these characteristics, and buying them at attractive valuation levels, we can construct a portfolio with both value and quality attributes.” Well, if it aint broke. Market seems to agree – shares tacked on 2.5p to close at 136p.

Winterflood: “Bottom-up stock-picking methodology resulted in overweight positions in South Korea, Indonesia and Mexico, as well as underweight allocation to India. JEMI is overweight Information Technology, Consumer Staples and Financials, while underweight Materials, Industrials and Healthcare.”

International Biotechnology (IBT) sees green shoots

IBT had a strong year: NAV rose +15.9% compared to the NASDAQ Biotechnology Reference Index’s +15.3%. Good start then for new managers Schroders and a welcome return to form for the sector as a whole after a tough few years. As Chair, Kate Cornish-Bowden, notes “It is rewarding to report on the green shoots of a recovery in the biotechnology sector following an unprecedented period of share price declines in the sector.”

Cornish-Bowden lists several reasons for having a positive outlook including strong fundamentals, ageing populations and innovation in disease areas such as oncology, obesity and neurological conditions. Throw in increasing M&A activity “as large, cash-rich pharmaceutical companies seek solutions to impending drug patent expiries”, compelling valuations “and the potential rewards for investors in innovative companies developing future treatments look more attractive than ever.” Market took a little while to appreciate the results – shares only added 1p on the day to close at 685p. But by 7 November the shares were exchanging hands at 710p each.

Numis “The track record remains strong, with the fund outperforming the index over one, five and ten years, due to its flexible, valuation-driven strategy, adapting to evolving market conditions via selective risk-taking, with a focus on limiting volatility via its approach to binary event risk and a basket approach to key themes. We believe that this approach means that the fund is well-placed to continue this outperformance over the long term.”

BlackRock Greater Europe (BRGE) thinks optimists will be rewarded

BRGE outperformed over the full year – NAV per share returned +16.4% compared to the FTSE World Europe ex UK Index’s +15.8% (sterling terms and dividends reinvested). The investment managers see structural and cyclical tailwinds at work in Europe. Structural, “the European market is home to an ecosystem of companies which possess the enabling technologies required not just AI adoption, but also the energy transition and global efforts to reorganise supply chains.” Cyclical, “we detect a cyclical upturn in a variety of industries like construction, life-sciences and chemicals which have suffered from pronounced volume declines for the best part of two years.” Put the two together and “We see 2025 as a recovery year for earnings and beyond that we envisage a multi-year period of healthy profit growth, alongside the potential for this historic valuation gap to the US to narrow. Those prepared to take the optimistic view should be rewarded over time.” Just not yet – shares shed 4p to 551p on the day of the results.

Winterflood: “Board used discretion to not implement semi-annual tender offer in November, due to market conditions. Key contributors included Novo Nordisk, ASML, RELX and Ferrari.”

Henderson Far East Income’s (HFEL) repositioning pays off

HFEL posted an +11.9% NAV total return for the year. While a tad lower than the FTSE All-World Asia Pacific ex Japan Index’s +13.0% and the MSCI AC Asia Pacific ex Japan High Dividend Yield Index’s +17.4%, the share price total return of +16.6% fared better. According to the fund manager “In many respects the period under review shared several similarities with the year preceding it; India and Taiwan were the strongest markets and technology was a standout sector performer whilst China remained weak and sentiment arguably worsened over the period.” Excellent timing as “Our repositioning of the portfolio at the beginning of the period was positive for performance given that we had predominantly increased exposure to two of the strongest performing markets – India and Taiwan.” Market liked what it heard – shares added 2.5p to end the day at 228.5p.

Winterflood: “Asian dividend growth ahead of the managers’ expectations, aided by South Korea corporate governance reforms and some promising developments in China (several stocks +50% DPS growth). Underperformance vs. Dividend Yield index due to the latter’s concentration and the portfolio underweight to Chinese state-owned enterprises, particularly banks.”

Fidelity Special Values (FSV) looking for the volume to go up

FSV’s NAV total return came in at +24.1% for the year, easily beating the FTSE All-Share Index’s +17.0%. Chairman, Dean Buckley, puts the strong returns down to “a quiet renaissance in the still-unloved UK equity market” as well as the fund’s focus on identifying “quality companies with valuations lower than peers within the UK market.”

It’s an approach that has worked well over the long term too: £1,000 invested in the fund 12 years ago when Alex Wright became lead Portfolio Manager would now be worth £3,055 with dividends reinvested. And there could be more to come thanks to “an improving corporate earnings environment, the prospect of some political stability and a gradual economic recovery” all of which “may help to bring greater attention to the many good companies listed on the London Stock Exchange, which would undoubtedly give further impetus to the market” and, potentially, “be the catalyst to turn a quiet renaissance into something with greater volume.” Market got the message loud and clear – shares added 2p to close at 311.5p.

Numis: “We rate the managers highly and admire the investment approach which has a strong contrarian flavour, looking for unloved stocks where the downside is limited and there is a catalyst for change. We believe that the c.10% discount is an attractive entry point.”

Investec: “since IPO in 1994, the NAV total return is a non-too-shabby 2,817% or 11.8% annualised, 5.2% greater than the FTSE All Share total return CAGR. We regard Fidelity Special Values as a core strategic holding for UK exposure, and the fundamental attractions are enhanced by the current discount.”

Scottish Mortgage (SMT): Man versus machine

SMT reported a +1.9% NAV per share total return for the six months to 30 September. That’s a little short of the FTSE All-World Index’s +3.6%. Different story over longer time frames though. Over five years, NAV is up +88.9%, easily beating the index’s +66.9%, while over 10 years NAV boasts a +347.8% gain compared to the index’s +211.3%.

The growth investor’s interim management statement opens with an admission “Writing the interim report this year was notably different. I didn’t start by sitting down with a blank page. Instead, AI systems competed to provide me with summaries of the most significant events over the past six months. They tried to explain stock price movements and even suggested topics that might resonate with readers.” The statement then goes on to provide a rather matter-of fact run-through of the fund’s various positions in AI, tech, space, China and private companies. None of the usual anecdotes, observations and dare I say colour of previous statements from the company – have a read of the Half-year Report 12 months ago to compare. Same author at the bottom true, but different style. Perhaps the machine did write the whole report after all. Shares were off 7p at 903p at the time of (non-AI) writing.

Jefferies: “The results highlight a meaningful reduction in the proportion of the overall portfolio held in private companies.”

Numis: “The shares are currently trading at c.10% discount, and ultimately a period of strong performance is likely needed to narrow the discount. Scottish Mortgage has a market cap of c.£11bn and therefore flexibility to return capital whilst remaining a large, liquid Investment Company.”

Why do so few people build a passive income stream ?© Provided by The Motley Fool

by John Fieldsend

It’s very much the case all around Britain. Our population is up to over 68m these days and of those, only 22m are funneling extra cash into the ISA tax vehicles. But even of the ISA holders, only 4m of these accounts are Stocks and Shares ISA where the most powerful of passive income investments lie. Folks seem to have pretty big reasons not to invest in this way. 

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Rough beginnings

One of the issues of building an income through stocks is how meagre the initial returns are. A figure like 10% isn’t wowing anyone, for example. Sure, if you do the maths, then the money invested begins to snowball given enough time, but the first year or two seems fairly pointless. Anyone who can sock away £200 might not be too thrilled seeing £1.67 average return in their first few months. Is that really worth sacrificing a day at the races or a new toy from Amazon?

But the way this kind of growth works often flummoxes the human brain, even those who have experience with it. I still remember a science teacher asking the class how tall an A4 paper folded over 100 times would be. Most of us guessed in millimetres or centimetres. One crazy classmate guessed over a metre. The answer was it would reach to the moon!

Stratospheric growth from modest beginnings in investing can work too.  Drip-feeding a monthly £200 at 10% might not make much after a year, but after 40 years it balloons into over £1m. While this little example is over a longer time span than many would have to work with, it shows how this growth does some bizarre-sounding things. 

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Stick to your plan until it sticks to you.

Jon Smith goes over the theory and the practical elements of what he’d need to do in order to solely live off dividend income from stocks.

Motley Fool

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

In a world of high interest rates and generous dividend yields, the possibility of generating sizeable passive income from my cash holdings is real. By being smart with the choices of where to invest and what time frames are involved, I feel there’s a potential for me (and other investors) to live solely off dividend income.

Understanding how it works

Before getting to exact figures, let’s run through how it’s possible to live off dividend income. The core idea revolves around the strategy of having a portfolio of stocks that cumulatively pay out enough cash to support my household bills and other expenses.

This portfolio isn’t something that can be achieved in a matter of weeks, unless I have a very large amount of free cash sitting in a bank account. Rather, this is something that needs to be built up over time.

Do you like the idea of dividend income ?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment.

Aside from the process of building the portfolio, to live off the income I need to sort other logistics. For example, I want to own enough stocks to receive some form of payment each month. Given that an average dividend stock might pay out a couple of times a year, this requires careful planning.

Another key point is that in the early days, it helps if I reinvest the dividends received. This will help to compound my gains and grow my pot at a faster pace. So I need to ensure that when I reach a point of taking money out of the portfolio, I’m aware that future growth will be slower.

A big pot needed, but not impossible

The figure that everyone needs to live off is different from person to person. I live in London, so mine will be higher than those living in rural areas. A fair estimate for me would be £35,000 a year.

I feel I can achieve an average dividend yield of 6.5% on a robust dividend portfolio. So my investment pot needs to be £538k to hit my financial target. On the face of it, this seems a very large figure.

Yet I never thought this was going to take a year or two. After all, living solely off dividend income is an incredible feat. But it doesn’t mean it’s impossible. For example, if I invested £500 a month, it would take me just under 30 years. That’s assuming my portfolio doesn’t encounter setbacks, which is always a risk, of course.

Granted, this might be too long for some investors, especially depending on their starting age. Things can be sped up if I already have a large investment pot, or a chunk of cash to put to work straight away. If I already had a £100k portfolio or cash deposit, it would only take me 19 years to reach my goal.

There are many different ways of looking at this strategy, but the reality is that there are people out there living solely off dividend income !

I’ve sold the Snowball shares in SOHO for a total profit of £4,698.64.

I will most probably buy back some shares next week starting with a clean slate and a stop loss, as I don’t want to give back most of the profit in case of bad news.

Trump won – what now for US clean energy?

Michelle Lewis 

Donald Trump will push fossil fuels and undo renewable energy policies, but it ultimately won’t stop clean energy’s momentum.

Trump has always pushed for more oil drilling and fewer regulations, left the Paris Agreement in his first term as president, says he hates “windmills,” promised to scrap offshore wind on “day one” if he won the 2024 election, and calls climate change a “scam.” And now that he’s won, this is a direct threat to the US’s pledge to reach net zero by 2050. After all, federal policy directly impacts the pace of renewable energy growth, especially when it comes to incentives and research funding.

The Biden administration’s ground breaking Inflation Reduction Act (IRA), which has spurred a clean energy boom, will be challenged under Trump. use Republican states have received 80% of the IRA’s money with which they’ve built factories and created thousands of jobs, a complete IRA repeal is unlikely. What’s more probable is that the Republicans phase out tax credits earlier than planned or cap overall funding.

Federal financial support for innovative technologies and projects could also take a hit. Brendan Bell, COO of Aligned Climate Capital, who formerly led the US Department of Energy’s Loan Programs Office, told Electrek:

My partner Peter and I led the DOE Loan Program Office under President Obama. We supported the first utility-scale solar and storage projects, as well as early EV investments – including the first loan to Tesla.

Today, these technologies are commercialized and are propelling the clean energy transition. None of it would have been possible if these programs had been cut off 10 years ago.

Put simply, Trump can’t turn back the tide of clean energy – but he could delay tomorrow’s solutions and the birth of new industries.

BloombergNEF’s “2H 2024 US Clean Energy Market Outlook,” released at the end of October, examined the worst-case scenario, where control of both the Senate and the House leads to a full repeal of the IRA tax credits:

The wind, solar, and energy storage sectors jointly see a 17% drop in total new capacity additions over 2025-2035, with 927 gigawatts (GW) of cumulative build compared to 1,118GW in BNEF’s base case forecast. Wind sees the greatest fall in activity in this scenario with a 35% drop, followed by energy storage at 15% and solar at 13% relative to BNEF’s base case.

That’s a blow we can’t afford at a time when we need to reduce emissions by 50% from 2005 levels by 2030 to avoid climate disasters becoming even worse than they already are.

But all is not lost. The clean energy market isn’t solely driven by federal policy. Over the last decade, solar, wind, and EVs have become more cost-competitive and popular. State policies play a huge role too, and many states are committed to their own clean energy goals regardless of who sits in the White House. States like California, New York, and Washington have ambitious targets to combat climate change, and deep red Texas is No. 1 in the US for both solar and wind.

Corporations are also key players. Companies like Amazon, Google, and Walmart have committed to going 100% renewable, and they’re not about to reverse course. This demand keeps the market for renewables strong. Plus, there’s significant public support for clean energy jobs, and renewables create more employment opportunities than fossil fuels in many regions of the country.

JD Dillon, chief marketing officer of California-based solar tech m (Nasdaq: TYGO), said to Electrek, “The march toward renewable clean energy is both inevitable and the right thing to do. In a perfect world, we would eliminate partisanship from the renewable energy conversation because everyone benefits from a cleaner environment and affordable energy. Unfortunately, none of us live in said perfect world.”

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Renewable share prices generally have been very week since the American election, which may be bad news but for the Snowball it’s good news as we should be able to re-invest the earned dividends at a better yield for longer. Remember the rules.

Foresight Environmental Infrastructure Limited

(“FGEN” or the “Company”)

Portfolio Update – HH2E Administration

FGEN made an initial investment into the green hydrogen sector in January 2023 and has since been working with management at its partner, HH2E AG (“HH2E“), to progress the development of several green hydrogen production sites across Germany.

The Company has invested a total of €22.3 million into HH2E (£19.3 million) representing 2.6% of net asset value as at 30 June 2024.  The investment into HH2E to date has principally been used to secure orders for long lead time equipment and develop HH2E’s first two green hydrogen sites at Lubmin and Thierbach, which are now both at a stage of requiring further capital to fund construction in line with the development consortium’s original business plan.

HH2E has recently undertaken a process to source additional third-party funding for ongoing development of the pipeline and construction of Lubmin, the most progressed of the sites. However, due to the nascency of the green hydrogen sector and challenging current global funding environment, the process has not led to a financing partner being secured within the required timeframe and at the required scale, and there is now material uncertainty over whether adequate funding will be achieved.

FGEN, along with its investment manager, Foresight Group (the “Investment Manager”), has given consideration to providing further funding to HH2E to allow it to continue to meet its commitments and requirements under German law. However, the Board does not believe that it is appropriate to do so at this time, reflecting the Company’s approach to portfolio construction, risk and capital allocation in the context of the current market environment.

Therefore, without the guarantee of third-party funding and as required by German insolvency law, HH2E management are expected to take the decision to file a petition for insolvency and enter administration. The Board and the Investment Manager are disappointed by this development, particularly given the potential for green hydrogen to play an important role in decarbonising heavy transport, industry, and other hard-to-abate sectors of the economy and the opportunity that remains at Lubmin and Thierbach.

HH2E’s administration process will focus on an outcome in the interests of all creditors. FGEN is an indirect creditor via its shareholding in Foresight Hydrogen HoldCo GmbH, which has provided shareholder loans to HH2E. Under German insolvency law, shareholder loans are subordinated to other creditors and as such it is expected that there will be no recovery of the invested amount.

The outcome of the administration process is not yet known, but the Company will update the market at the appropriate time.

The investment in HH2E is the only development-stage investment in the FGEN portfolio. FGEN’s dividend target for FY 2024/25 is 7.80p per share and the Board reassert that target with expected dividend cover in the range 1.2-1.3x. The Company will publish its interim results for the six months ended 30 September 2024, on Thursday 21 November 2024.

Disclaimer

Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by Greencoat UK Wind. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research. Overview Analyst’s View Portfolio Gearing Performance Dividend Management Discount  Charges ESG. Kepler. 

UKW in a good position to continue to deliver attractive returns…

Overview

UKW is the fifth largest owner of wind farms in the UK and is in a strong and unique position to help the UK’s transition to a low-carbon economy through its simple business model. By investing in wind farms, UKW aims to provide a comfortably covered dividend. Each year it should be in a position to reinvest surplus cash flows to grow NAV; the managers see their role as stewards of shareholders’ capital, determining the most accretive use of these surplus cash flows.

The recent Q3 NAV announcement offers an insight into how the board and manager are thinking about capital deployment. With the discount relatively wide, cash was used to progress the previously announced buyback programme. As the discount narrowed, the relative attractions of an incremental investment in the Kype Muir Extension wind farm came to the fore. We understand that the investment opportunity came through the exercise of UKW’s shareholder rights in the project, and was on highly attractive terms. The worth of this transaction is shown in the NAV accretion from the £14.25m deal, which exceeded the accretion from the £16.8m worth of buybacks also made over the quarter. In our view, this shows the benefit of UKW’s cash generative model, which gives the trust flexibility to take advantage of opportunities.

The recent NAV announcement also included news that UKW’s shorter-term debt has been successfully refinanced and UKW has no further need to repay any debt for a further two years. The overall weighted average interest rate has risen by an immaterial amount (4.68% as at 30/09/2024 vs 4.63% as at 30/06/2024). We understand that the board sees the current level of long-term gearing as attractive and sustainable, though it has been noted that proceeds from any disposals would likely be used to reduce gearing.

Analyst’s View

The recent NAV announcement provided some interesting information on the board and managers’ thoughts in the current environment. But with UKW trading on a discount to NAV, and further equity raises therefore off the table, the team are optimising returns for shareholders on a dynamic basis. Key to their ability to do this effectively is UKW’s impressive surplus cash flows, over and above that required to pay and increase the dividend in line with inflation. As at 30/06/2024, UKW has paid £1,074m in dividends and generated (and reinvested) £935m of excess cash flow.

The attractive terms achieved in the recent refinancing show that borrowing even in the current environment is not blunting shareholder returns, with the weighted average interest rate effectively unchanged. In terms of outlook, UKW seems well positioned to continue to deliver strong total returns to shareholders with the majority of returns coming in the form of an attractive dividend that yields well in excess of government bonds.

As we have discussed, that UKW currently trades at a discount has not impacted the manager’s ability to allocate capital and generate NAV accretion, as the most recent quarter illustrates. With the dividend yielding 7.5%, UKW’s shares are an interesting proposition for investors wishing to take advantage of the potential for rates to fall. Should the ten-year yield fall back once again, UKW may benefit from the discount narrowing, providing outsized returns to shareholders who bought shares at a wider discount to NAV.

Bull

• High dividend yield well covered by cash flows, gives plenty of flexibility to managers for accretive investment activity
• Continued commitment to RPI-linked dividend growth, yet trading on a discount to NAV
• Diversified portfolio of institutional-scale assets, spread around the UK

Bear

• Discount to NAV may persist, meaning UKW cannot raise equity capital
• Gearing exacerbates underlying asset valuation movements
• Valuations based on long-term assumptions that may (or may not) prove optimistic