Investment trusts are new fad for ESG investors

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Last week was a standout one in the government’s push to ‘build back greener’. Boris Johnson announced all UK energy would be renewable by 2035 and it surfaced that he was offering one-on-one meeting with asset managers who promised to invest in infrastructure.

The letter received a mixed response, apparently. But if the government’s incentives didn’t tempt advisers and planners to ramp up their ESG offerings, perhaps this will.

Ethical investors are pouring interest in to investment trusts, also known as investment companies. Such that environmental impact and social impact trusts have reached NAVs of £12bn and £15bn, according to research by the Impact Investing Institute and Jura Capital.

This is up from NAVs of under a billion for both categories in 2013 and without trusts seeing much of a pandemic dip. In fact, while UK dividends plummeted 34% between January and June 2021, investment trusts relied on capital reserves and saw an increase of 2% in the same time frame.

But aside from often consistent high yields – what’s the catch for ethical investors, and should advisers jump on the bandwagon?

The catch

Assets such as renewable energy infrastructure projects and social housing are a particularly appealing investment choice for ESG consumers. This is because the contracts on these projects typically last between 20-30 years, meaning investors can contribute to environmental and social change for the long-term.

Unfortunately, the open-ended fund structure makes it difficult to back such long-term projects. Managers are constantly engaged in a balancing act, buying and selling underlying assets to account for investors’ moving their money in and out. Meanwhile, the close-ended model of investment trusts ensures managers have an ongoing basis of investor inflows to support these contracts.

Advisers and investors can sort for ethical-focused investment companies by category here. ESG disclosure information under the ‘ESG’ tab on the company’s page. If there is no tab, the company has chosen not to disclose.

Issues for advisers: gearing and access

Investment trusts are considered ‘riskier’ because higher levels of borrowing is more common. Trusts will usually gear at a maximum of 25-30% while for all open-ended funds available to retail investors, borrowing is capped at 10% of net asset value (NAV).

Companies tend to be transparent about their gearing but the AIC website is misleading here. Companies’ individual fund pages state they are 0% geared, but advisers should note that this may be because debt is held in a holding company, rather than at fund level. Advisers and investors may need to enquire about gearing from the companies themselves.

Additionally, investment trusts usually aim to amortise long-term debt and should have strategies in place to protect investors if financial difficulties occur.

Bluefield is a prime example. The company, which has a primary focus on solar PV assets, closely monitors debt and has several strategies to cover it. ‘We have high levels of debt service cover of about three times’, says James Armstrong, managing partner of Bluefield Partners. ‘Additionally, the bank is taking security over a wide portfolio of assets, minimising default exposure.’

Finally, advisers have shared with Citywire New Model Adviser that they find investment trusts too complicated to assimilate in to existing portfolios or to use on existing platforms.

Helpfully, details such as which platforms facilitate investment companies, and how much different platforms charge to host, trade and invest in them, are provided on the AIC website.

New Model Adviser picks: top ESG performers

For advisers hoping to pick out the best ESG products, Bluefield’s Solar Income Fund is certainly one to watch, with net assets of £562.4m and 3-year annualised returns of 7.3%, according to Morningstar. Its parent company holds renewable wind and battery power assets as well as solar, and was the first solar-focused trust to be listed on a major stock exchange.

Impax Environmental Markets’ success is difficult to ignore, thanks to its diversified and active portfolio. Total return on net assets was at 32% for the last financial year and the company boasts net assets of £1.4bn, according to the AIC website. Investors will be happy to hear that all new acquisitions undergo an ESG screening and analysis – a process reviewed on a yearly basis.

Finally, there is Impact Healthcare REIT for investors focused on the social side of ESG. The Trust has traded at a premium since January and its share price has outperformed NAV for the past year. It holds a diversified portfolio of healthcare real estate assets, with a current NAV of £454.9m, according to the AIC. 

Advisers can find information on companies the AIC’s adviser hub, including what premium or discount companies trade at, and what this has been in the past; gearing, company factsheets, and performance data provided by Morningstar