Here’s my portfolio review for the third quarter of 2023. I am up 2% year-to-date having been up 4% at the end of June. Global markets have risen 8% year-to-date while the investment trust index has lost 3%.
This table summarises both my recent and longer-term performance against a few comparators:
|FY 2022||FY 2021||Annualised|
|Vanguard FTSE Global All Cap (fund)||+7.9%||-8.0%||+18.9%||+7.8%|
|Vanguard LifeStrategy 60 (fund)||+3.8%||-11.2%||+9.9%||+3.5%|
|Vanguard UK All-Share Index (fund)||+4.5%||+0.3%||+18.2%||+3.2%|
|FTSE Closed-End Investment (index)||-3.1%||-16.6%||+12.8%||+4.1%|
Notes: The Vanguard global tracker fund is my main benchmark and I have a stretch target of beating it by 2-3% per annum over the long term. The more conservative LifeStrategy 60 fund (essentially a global 60% equity/40% bond portfolio), a UK index tracking fund, and an index of UK investment trusts are included as additional reference points. All returns are measured in sterling using a unitised method that adjusts for any money put in or withdrawn. All my trading and holdings costs are included in my returns but no such costs are included for the fund and index returns.
Global markets ended the third quarter more or less where they started, but my portfolio and the broader trust sector both slipped a little. Widening discounts continue to explain part of the difference but UK small-caps and healthcare, which are two of the four themes I have put money into outside of my core global holdings, have been struggling for a while now. More recently, my infrastructure/renewable holdings have also lagged.
I still like all of these themes and I remain confident that their long-term performance will be satisfactory, but it looks like (even more) patience will be required. My long-term plan has been to add to each of these themes on weakness, to benefit from any greater volatility they display, and so far I have pretty much stuck with that. It’s not always easy, though!
My performance by holding
Here’s how my positions have done on a share price and NAV basis along with their current rating. The column headers should be sortable although this may not work on some mobile devices.
|Gresham House Energy Storage (GRID)||-32.2%||-2.2%||-27.7%|
|Bluefield Solar Income (BSIF)||-8.5%||+2.7%||-16.0%|
|HICL Infrastructure (HICL)||-21.2%||+3.3%||-26.5%|
|JPMorgan Global G&I (JGGI)||+12.4%||+10.1%||+1.6%|
|Vanguard All-World ETF (VWRL)||+8.4%||+8.4%||+0.0%|
|Lindsell Train Global||+2.4%||+2.4%||+0.0%|
|RIT Capital Partners (RCP)||-8.3%||+1.3%||-20.1%|
|Keystone Positive Change (KPC)||-0.8%||+0.2%||-13.9%|
|Bellevue Healthcare (BBH)||-6.4%||-7.4%||-8.1%|
|Worldwide Healthcare (WWH)||-3.3%||-1.8%||-9.2%|
|International Biotechnology (IBT)||-8.6%||-5.8%||-5.7%|
|Baronsmead Venture (BVT)||-4.4%||-4.1%||-5.0%|
|Henderson Smaller Companies (HSL)||-11.9%||-8.5%||-12.8%|
|BlackRock Smaller Companies (BSRC)||-5.6%||-5.5%||-13.3%|
Note: the links go to my trust profiles, all of which were written some time ago. My views on most of them probably haven’t changed that much but the information they contain will be quite dated.
The weighted average discount across all my positions was 5.9% at the end of September. That compares to 5.7% at the end of June, 4.7% at the end of March, and 4.0% at the end of 2022. In other words, it’s been getting a little wider each quarter.
Trading-wise, I added to both Bluefield Solar and Gresham House Energy Storage in the last quarter. Earlier in the year, I topped up HICL, Bellevue Healthcare, HgCapital, Keystone, and the Vanguard global tracker.
Here are some quick thoughts on my holdings, including a more detailed look at the three infrastructure/renewable trusts that I own.
JPMorgan Global Growth & Income continues to be the stand-out performer while the likes of Smithson and Keystone have fallen back to roughly break even after their strong start to the year. Fundsmith and Lindsell Train have also slipped back but to a lesser extent. RIT Capital Partners has now bought back about 5% of its shares since the start of March, adding roughly 1% to its NAV.
Renewables and Infrastructure
This is a small part of my portfolio but it’s where I have been topping up the most recently after some big share price declines. My view is that while some of the share price falls we’ve seen are justified due to the rise in interest rates, the discounts on many of these trusts look excessive, especially those with longer track records.
HICL Infrastructure has sold around £300m of assets in recent months (nearly 10% of its portfolio) and it also issued £150m of long-term debt. These actions have brought its revolving credit facility down from £500m to £130m. The shares still sit on a very wide 26% discount with the flat dividend in recent years not helping matters. A few of its assets have paused distributions to their shareholders in the last few years although it seems they are now restarting or are expected to quite soon. Dividend cover was 1.03 times last year and it looks like it needs to hit 1.1 before any dividend increase is entertained. I might add to HICL again if its dividend cover continues to improve.
Gresham House Energy Storage (GRID) has taken a real beating and gone from being the only renewable trust trading at a premium back in May to a hefty 28% discount. Slow investor communication has been a big issue here, in my view. The revenues from energy storage aren’t subsidised and are far more variable than other forms of renewables but GRID didn’t really outline the extent of the decline it’s seen in 2023 until September. Dividend cover was 1.3 in 2021 and 2022 but we now know it was only 0.6 in H1 2023.
Many of GRID’s new projects have taken longer to complete than expected. Although this is largely for reasons that seem to be out of its control, again shareholders haven’t really been kept up-to-date. The recent interim results call did include a very useful explanation of the state of play for each project under construction and what needs to be done before they are ‘energised’. In most cases, it’s not very much at all.
The hope is that six new projects will come online over the next six months or so. This should increase overall battery capacity by 60%, getting the dividend cover run rate back up to one again. Clearly, this is something to watch closely to see whether it does indeed happen.
There are essentially two main types of revenue for energy storage firms like GRID.
- The first depends on services to help National Grid keep the electricity network running smoothly. This sounds like it should be quite stable from month to month but it is still very much in the development phase and currently going through growing pains.
- The second is energy trading which takes advantage of short-term price volatility — this is expected to be the main revenue earner in the long term but low price volatility in recent months has meant it has not grown as quickly as expected.
Ben Guest, GRID’s lead manager, seems confident enough that higher revenues for both forms of revenues will return but also warns that they will continue to be very cyclical in nature, so this is something that shareholders need to get used to.
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Modo Energy publishes regular monthly benchmark figures for the UK battery storage industry, which I only came across quite recently. For example, this chart shows the variation in the revenue earned per month by the typical battery storage firm for each 1MW of capacity:
The fall in monthly revenues over the last year is clear to see and something that I feel should have been covered more clearly in the 2022 results that were released back in April. For example, 1 MW of capacity earned around £80,000 in revenues in the first half of 2022 and £70,000 in the second half. In the first half of 2023, revenue per MW fell to around £27,000. We also have figures for July, August, and September, which total £13,000 per MW, so the second half of 2023 looks similar to the first half, although there are signs there could be some improvement in the final three months of the year.
GRID had nearly 600MW of capacity in operation throughout the first half of 2023 and generated revenues of £20.5m, so its performance appears to have been around £35,000 per MW for the first six months of 2023, a little better than the industry average shown above. The total UK battery storage market is reckoned to be around 3,000MW so GRID has a 20% market share, down from the 30% level it had for the last few years.
Although I am annoyed at the slow investor communication, I’m culpable as well. I knew monthly revenues would be volatile, although I didn’t appreciate how much, and I should have been paying closer attention to the available industry data to get a better feel for this.
The fact that GRID raised £50m at 155p in a placing in May, including a little from me, has no doubt caused some additional upset among investors. Three of the five directors took part in the placing and one of three, who was appointed in October 2022, has also been buying shares throughout this year. Four of the five directors bought shares in the first week of October, albeit fairly small purchases. Both Gresham House, the trust’s management firm, and Guest remain major shareholders here, which is good to see.
GRID’s placing was intended to raise £80m to build out a new project in the US so now there is talk of disposing of a few smaller UK sites to make up the difference. GRID has currently drawn down £110m of a £335m debt facility that is available until 2028. There are plans to draw down the rest of this facility to fund the construction plans up to mid-2025. But this debt is eye-wateringly expensive at three percentage points over SONIA (so just over 8% at present). Interest on the £110m drawn down already has been hedged at a slightly lower but unspecified rate.
All that said, I did buy a little more GRID last week after its half-year results were released, mostly reinvesting some dividends it had just paid out. However, I have also noticed that Bozkurt Aydinoglu, who I saw present for the trust a few years back at a Mello event and who I assumed was Guest’s #2, recently left Gresham House to join another firm in this space. Gresham House is in the process of being acquired by Searchlight Capital Partners but I don’t think that should have too much impact on GRID’s operations, but it’s worth keeping an eye out to see if there is staff turnover once this deal has been completed.
Without a doubt, it’s a very complicated situation at GRID at the moment but an intriguing one.
Bluefield Solar Income‘s recent results were a much more serene affair with a total of 8.6p in dividends paid out for the year just gone, above the original 8.4p target, and 8.8p pencilled in for the year ended June 2024. Dividend cover is around two times, thanks to the strategy of fixing power prices between a few months and a few years ahead, and it should stay at around this level for the next year or two, given the fixes already in place.
Debt levels have risen a bit at Bluefield and there is a massive pipeline about one and a half times the size of the current portfolio in capacity terms. It looks like some of these assets may be sold off either before or after construction, depending on future funding conditions. About a third of the pipeline by capacity is energy storage so Bluefield’s revenue profile could become much more volatile if those assets are retained.
One thing mentioned in the latest results that I hadn’t appreciated was the recent difficulties with the offshore wind auctions could result in more favourable pricing deals for new solar projects.
Bluefield’s discount of 16% is narrower than most other renewables trusts at the moment but, of the three, I have the most confidence in its management team so I can see myself adding to this position again.
Tech-Focused Private Equity
HgCapital released what seemed to be a solid set of interim numbers last month and there have been numerous disposals above carrying value in recent months. Its discount has narrowed a little but is still around the 20% level. The shares have made three moves above the £4 level in the last few months (as well as another one back in August 2022) but have fallen back down each time.
Biotechnology and Healthcare
International Biotechnology has found a new home in the form of Schroders Capital with Ailsa Craig and Marek Poszepczynski continuing as co-managers. The actual switch should take in November, just after the release of the results for the year ended 31 August. No major changes are expected to the overall strategy, which is what I was hoping for.
UK Small Caps
Nothing of note here although there are rumblings about what might happen to AIM companies if inheritance tax was to be reformed. It won’t affect all AIM companies, possibly a third of them according to some comments I’ve read, but Henderson Smaller has around 30% in AIM, BlackRock Smaller about 45%, and Baronsmead 30% directly plus another 15% in three fund investments it holds. If AIM tax reliefs were scrapped, this could cause some further pain for this market. Some of AIM’s recent poor performance could be because of these concerns, of course.
KR1 keeps ticking along. It made an early investment in a project called Celestia that might launch by the end of the year so that could help its NAV.
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