In a post-Brexit world of falling government bond yields, pension funds, which already had the headache of working out how to cover their long term liabilities at low risk, now have a migraine.
DIY pension savers or anyone looking to invest for the long term faces the same challenge of finding something with a decent enough return to cover long term risks.
Many are simply opting for the traditional safe haven of gold. Since Friday morning, The Pure Gold Company has seen a 69 per cent increase in what it calls “atypical” investors buying gold for the first time, including teachers, doctors, parents, property developers and retirees.
However, a slow and steady trend of pension fund managers buying renewable energy might now, in the absence of many other options, take on new impetus. And there is reason to think that some everyday investors could follow suit.
This is because renewable energy delivers fairly predictable, long-term cash flows. The cash flows are predictable because most of the return is made up of incentives, such as feed-in tariffs or “contracts for difference”, which are agreed at the time of installation and last for 20 years, plus the price of the electricity.
Might the appeal of renewable energy as a diversifier increase as a result of investment uncertainty?
Bruce Davis, at Abundance Investments, which typically sells long-term debentures of 20 years in wind and solar developments to retail investors, thinks it might.
“Volatility in global markets will be the main problem for people trying to save and invest for their future. However, with government bond yields falling to almost negative territory the choices open to those seeking low risk, low volatility investments are limited.
“Investors would do well to look at the pension funds snapping up investments in operating renewable energy projects which offer a relatively low risk, long term and stable source of revenue generating the energy we need.
“The danger is that investors don’t recalibrate their expectations for the new, uncertain world we live in and chase returns without fully examining the underlying risks.
“Renewables offer an uncorrelated investment which allows even small investors to diversify away from volatile markets and invest in projects whose returns are based on flows of cash, not shifts in market sentiment.”
There are concerns that in a post-Brexit world, support for renewable energy development would be cut, as renewable energy targets were set by the EU. This would mean that in future, the main opportunities to invest in renewables will be through refinancing existing projects that are already in receipt of their subsidies, rather than fund the construction of new ones, because the new ones may not receive the same subsidy level as those already built.
Abundance and Ethex list opportunities to invest in renewable energy projects. Abundance is currently offering an 8 per cent return over 7 years for a new biofuel project. Energy 4 All is promoting a share raise for the M&S Energy Society, M&S Energy’s community energy division, and is quoting an expected return of 5 per cent. Please remember that your capital is at risk.
Funds that have a high % of renewable energy include WHEB Sustainable, Royal London Sustainable Leaders and Alliance Trust Sustainable UK Growth.