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One investment that will protect you as the economy slows – and it isn't gold

renewable energy green investment
renewable energy green investment

Investors find themselves at something of a crossroads. Do they keep their powder dry and stay out of the market, only to see their cash ravaged by an inflation rate at a 40-year high? Or do they risk their money in the market as we teeter on the brink of a recession?

Such is the challenge of stagflation – that toxic combination of high inflation and little or no economic growth.

In such an environment the accepted wisdom has been to invest in “real” assets, things that have intrinsic value now. One obvious example has been commodities, which have performed well so far this year but have cooled of late over predictions of slowing global growth.

Precious metals such as gold are another option, but arguably this is more a place to shelter money rather than a way to invest for capital growth. And of course there are no dividends. So, where to turn for capital and income returns that are largely uncorrelated with the wider market?

One area that ticks both these boxes is Britain’s renewable energy sector, which is underpinned by government drives both to decarbonise and to secure security of energy supply – suddenly top of the agenda amid the current geopolitical turmoil.

One trust that stands out from the crowd is JLEN Environmental Assets, managed by the Foresight Group, an experienced player in this sector.

JLEN invests in infrastructure projects that either support the transition to a low-carbon economy or mitigate the effects of climate change. The trust has net assets of around £760m, boosted by two share sales totalling more than £118m in the last financial year.

This not only increased its financial firepower but, because the new shares were also offered to private savers, diversified the shareholder base and improved liquidity in the shares. The trust is one of the largest in the sector and this is reflected in a lower than average cost of 1.2pc a year.

Perhaps what is more pertinent though is that JLEN has the broadest remit among its 21-strong peer group: it has invested in 37 projects covering wind, solar, anaerobic digestion, waste and bioenergy, hydro and various low-carbon and efficiency projects including battery storage.

This high level of diversification helps to ensure that JLEN, unlike many rival funds, does not depend on a single market or set of climatic conditions; useful when the summer of 2021 witnessed the lowest average wind speeds for 40 years. Many of the other funds in the sector invest in either solar or wind or a combination of the two. Three focus solely on energy storage.

Furthermore, JLEN aims to invest in projects that tend to have predictable cash flows underpinned by long-term contracts under which prices are linked to inflation (and to the RPI as opposed to CPI); the trust says the portfolio currently has price fixes secured over 77pc and 74pc for the summer and winter 2022 seasons respectively.

Such is this reduced exposure to price volatility that the trust expects that, even if wholesale prices were to halve, the dividend cover would fall by less than a fifth of a percentage point, thereby maintaining a significant safety margin.

As it stands, the trust has said it expects to pay a total dividend of 7.14p in 2023, which would represent a rise of 5pc on 2022 and equate to a yield of 6.0pc at yesterday’s closing share price of 119.6p. As well as this healthy and secure dividend, there is also the potential for capital gains from quarterly NAV revisions.

Because there is no market deep or liquid enough to readily mark JLEN’s assets to a market value, these valuations do involve some subjective forecasts, including for future power prices and inflation.

The last valuation at the end of March led to a rise of almost 15pc in NAV, which does suggest that there may be an element of conservatism baked in. Should power prices remain at current levels, it would not be unreasonable to expect further rises, particularly when 5pc inflation is assumed for the rest of 2022, followed by 3pc until 2030.

With JLEN sitting on a premium of 3.7pc to its net assets versus 12-month and three-year averages of 5.7pc and 14.3pc respectively, Questor sees this as an attractive entry point.

Questor says: buy

Ticker: JLEN

Share price at close: 119.6p

Nick Cox-Johnson is a former fund manager, chartered accountant and company adviser

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