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QD – review of the year

A Woman's Hand Turns Over A Calendar 2023 into 2024

This is the last of our weekly emails for 2023. We hope that you have been finding them useful. We will be publishing our annual roundup in January. Ahead of that however, I thought it might be worth pulling out a few of the year’s highs and lows.

In January, China’s market shone as hopes grew that the lifting of COVID restrictions would lead to a resurgence of its economy. Those hopes were dashed not long after and Chinese funds have had a pretty dreadful 2023 with China’s domestic market and Hong Kong amongst the worst performing of all markets this year (only Kenya and Nigeria have fared worse).

JLEN Environmental Assets and HydrogenOne announced that they were both backing a German green hydrogen producer – HH2E. We have written a fair bit about the opportunity in green hydrogen since. Read our JLEN note from November Backing the green hydrogen revolution or our HGEN note from October Sky is the limit for HGEN for more information.

February was the month that Aquila Energy Efficiency failed its continuation vote, and abrdn Smaller Companies Income Trust announced a strategic review. It did not feel like it at the time, given that these were relatively small funds, but this was the start of a juggernaut of corporate activity in the sector.

March was the month that Silicon Valley Bank collapsed, triggering a run on a number of similar institutions. We wrote about the causes and flow on effects of this in our note on Polar Capital Global Financials Trust Avoiding mishap. Scottish Mortgage found itself in the news following a falling out between its directors. March also saw the release of Chat GPT-4, kickstarting a mania for anything related to artificial intelligence (AI) and the remarkable run of outperformance for the ‘magnificent seven’ mega cap tech stocks with exposure to the theme: Apple, Microsoft, Amazon, Alphabet, Meta, Nvidia and Tesla.

April was when ThomasLloyd Energy Impact (now Asia Energy Impact) first hit the buffers, igniting a war of words that eventually saw the manager dismissed. Its shares have been suspended ever since. Headline news that month included the sector’s largest IPO of the year – raising a modest £30m –Ashoka White Oak Emerging Markets – and the first bid, a knockout £511m for Industrials REIT.

In May, the pace of corporate activity picked up. Civitas Social Housing succumbed to an opportunistic bid and LondonMetric said it would buy CT Property Trust. May was also the last time that an investment company managed to raise a decent amount of money. Gresham House Energy Storage raised £50m to fund a storage project in California. It got in just under the wire as from that moment on, every investment company focused on renewable energy traded at a discount, calling a halt to the sector’s expansion and forcing a rethink about strategy for some funds.

Geiger Counter – the specialist uranium fund – was the best-performing investment company in June. Our note Powered up for growth, published in November,  gives an insight into what may be a key part of the fight to tackle climate change. Weather problems hit Ecofin US Renewables that month as a tornado took out the grid connection to its Texan wind farm, triggering the likely demise of this fund.

In addition to the bids that we have seen in the sector this year, there have also been a fair few mergers. July saw the announcement of a tie up between abrdn New Dawn and Asia Dragon.

In August, we wrote a note on GCP Infrastructure, Merger to unlock compelling value?, which discussed a potential three-way combination with GCP Asset Backed income and RM Infrastructure Income. Unfortunately, it was not to be. The two potential merger partners fell away, and both look likely to disappear. The value is still there in GCP Infrastructure – it has since come up with a new plan.

A bid was announced for Round Hill Music Royalty in September at a substantial premium to its prevailing share price. Elsewhere, Digital 9 Infrastructure ran into trouble and was forced to suspend its dividend payments.

October was a tumultuous one for markets as investors panicked that interest rates would climb even further – 10-year treasury yields briefly breached the 5% threshold for the first time since before the collapse of Lehman Brothers in 2007. In the month, we highlighted problems with regulation that were weighing on the sector. Pleasingly, there have been positive developments on this front since. Chrysalis outlined long-term plans to tackle its discount that look set to bear fruit soon.

In sharp contrast to October, November was a much better month for markets as hopes grew that US rates had peaked and would start to fall in 2024. Rate-sensitive and growth-focused strategies began what may be a long recovery. Digital 9‘s sale of its flagship asset disappointed, and three more mergers and a takeover were announced. Progress was made on capital recycling within renewable energy funds – NextEnergy, for example, sold a solar plant in pursuit of its plan which we outline in our note, Recycling champion, and Downing Renewables mulled spinning out part of its Swedish hydropower business (which we described in detail in our note Powering ahead).

In December so far, the latest chapter in the ongoing saga of Hipgnosis brought a delay to publication of its interim results following a row about the valuation of its assets; the biggest merger of the year may be underway as LondonMetric targets LXI REIT; Octopus Renewables Infrastructure is stalking Aquila European Renewables; and abrdn Diversified Income and Growth said it was thinking about winding down. There is good news too we think. The reshaping of the sector in the face of adversity is producing potential new winners. One of these might be a newly reconstituted Invesco Select Trust, which is setting itself up in competition with one of 2023’s winners, JPMorgan Global Growth and Income. We would also highlight Bluefield Solar’s innovative tie-up with an infrastructure investor as a way of financing its pipeline.

The sector’s ability to adapt, right-size and reimagine investment strategies in response to shifts in markets and investor demand is one of its great strengths. 2023 may have been a tumultuous year but it may also have laid the foundations for a better future.

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