The escalating cost of fossil fuels has recently thrust the United Kingdom’s reliance on natural resources into the spotlight. In this climate, the pursuit of renewable energy, aiming to harness power from sustainable sources, has taken on a new urgency. However, investing in this sector can be a precarious affair, largely due to its inherent susceptibility to weather patterns.
Yet, one investment trust has managed to carve out a distinct niche: the Foresight Environmental Infrastructure trust. This fund is strategically designed to mitigate the risks that typically plague other renewable energy trusts. Unconventionally, a mere 38 per cent of its portfolio is allocated to wind and solar power, a significantly lower proportion compared to its peers in the renewable energy infrastructure space.
A Diversified Approach to Green Energy
Since 2019, Ed Mountney has been at the helm of this £430 million trust, co-managing it with Chris Tanner and Chris Holmes, who are part of the London-based investment management firm Foresight.
The trust’s investment strategy extends beyond traditional wind and solar, encompassing a broader spectrum of environmental infrastructure. This includes facilities like advanced greenhouses and solar panel installations, all geared towards the generation, storage, and distribution of renewable energy.
“Our objective is to function as a diversified renewable infrastructure fund, rather than solely focusing on wind and solar,” Mountney explains. The management team has strategically deployed approximately 44 per cent of the trust’s total assets into the next generation of clean energy technologies. This forward-thinking allocation includes investments in biomass, controlled environment glasshouses, and low-carbon transportation solutions.
Flagship Investments and Performance
A prime example of the trust’s strategic investments is the Cramlington Biomass plant located in Northumberland. This facility, which accounts for just under 10 per cent of Foresight’s assets, represents the trust’s largest holding. It efficiently generates renewable energy by utilising forestry residues, such as treetops. This investment has proven to be remarkably successful, delivering a substantial 25 per cent return within three years of its acquisition out of administration in 2021.
While the broader renewable energy infrastructure sector has weathered some turbulence over the past five years, Foresight Environmental Infrastructure has demonstrated resilience. The trust has experienced a decline of 5.5 per cent during this period, a performance that outshines the average renewable trust, which has seen a loss of 15 per cent.
Navigating Interest Rate Environments
The sensitivity of renewable energy infrastructure trusts to rising interest rates is well-documented. Developers often require substantial borrowing to finance the significant upfront costs associated with constructing wind and solar farms. Mountney acknowledges this economic reality, stating, “We have accepted that we are in a higher-for-longer interest rate environment. Consequently, investors should anticipate less of a shock factor if rates are reduced once rather than twice in the coming year.”
Looking at a longer timeframe, Foresight has delivered an impressive 42 per cent return over the past decade, surpassing the average return of 38 per cent achieved by its renewable energy infrastructure trust counterparts.
The Appeal of Growing Dividends
A significant draw for investors in the Foresight Environmental Infrastructure trust is its consistently growing dividend stream. This income is generated from highly cash-generative businesses within its portfolio, such as those involved in anaerobic digestion. This process, which breaks down animal waste and food scraps, produces valuable biogas and biofertiliser. Wind and solar infrastructure also contribute as strong cash-generating assets.
The fund’s management employs a dual strategy of investing in both income-generating and growth assets. This approach fosters a sustainable cycle where approximately 80 per cent of returns are dedicated to covering the dividend payouts. The remaining 20 per cent is then reinvested into growth assets, fuelling future expansion and potential capital appreciation.
The trust has a commendable track record of increasing its dividends for ten consecutive years, a streak that began with its launch in 2014. Its current dividend yield stands at a robust 10.9 per cent, which is slightly higher than the average of 10.5 per cent offered by its peers. Looking ahead, the trust has set a target dividend of 7.96 pence per share for the financial year ending March 31, 2026.
An Opportunity for Bargain Hunters
Currently, the Foresight Environmental Infrastructure trust presents an attractive proposition for value investors, trading at a substantial discount of 32 per cent. Should market sentiment shift positively and this discount narrow, shareholders could stand to benefit significantly from both income and capital growth.
Mountney remains optimistic about the sector’s future prospects, concluding, “The imperative for decarbonisation to ensure energy security will undoubtedly persist, making renewable energy infrastructure an increasingly compelling investment.”
Investors can identify the trust on the market under the ticker FGEN.
