You couldn’t make it up

A note on wind power and net asset values

Good morning all,

Dr John is here today. He has identified a potential scam in the making in the way that renewables trusts (solar, wind, battery storage) determine their NAVs. Plus he has a recommendation for an infrastructure fund. Enjoy!

All the best,

Dominic

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Making money out of wind

An investment trust has a share price and an underlying net asset value (NAV). The NAV is generally based on the actual realisable price of the assets. In theory, if one closed an investment trust down and sold off the assets and returned all that cash to shareholders, each shareholder would get the NAV per share, not the share price.

This does happen. It’s happening right now to VPC Speciality Lending (LSE: VSL), which is a direct lender I have covered before. The share price is around 71p and the NAV around 90p.

Over the next few years investors (me included) are hoping to get around 95p back, plus dividends in the interim, as the assets are sold and cash returned.

The share price generally trades at a discount to the NAV - mostly due to (lack of) popularity, plus a degree of uncertainty and liquidity, if the assets are not traded daily on a stock-market.

Here is an example of the discount for Scottish Mortgage (LSE: SMT), a massive, very active investor in disruptive technologies. Simply put, it was in a very popular space (technology), with lots of real-time quoted, liquid assets, and everyone liked it, and technology too. It actually regularly traded at a premium to the value of its assets in 2019.

(source: Scottish Mortgage)

Then a double whammy: first it bought some unlisted assets, including some in China, adding valuation uncertainly, and second technology fell out of favour.

From trading at a premium (5% above NAV) it now trades nearly at a discount nearly 20% below NAV. That’s like a share price falling from 105p to 80p on fear, uncertainty and doubt alone.

If NAV was a proxy for cash realisable in a sale, one could simply buy unpopular investment trusts and wait for the discount to narrow. (Yes, I took a small position in Scottish Mortgage recently.)

But it’s important to remember: discounts exist for a reason.

A scam in the making? Or does everyone know this already?