“Please allow me to introduce myself, I’m a man of wealth and taste”.
– The Rolling Stones
I am the epitome of an enigma, for you see, I am a water guy, yet I live in landlocked Colorado. I love the mountains, but I love the water too, in all its forms including oceans, lakes, rivers, and snow. I was born under the sign of Aquarius, the water bearer. I grew up by the ocean and learned to surf, and then surfed all over the world. I played water polo and was on the swim team in high school. Then I went to work for several different water resource agencies over the span of my 40-year career. My regular daytime work involves delivering fresh clean water daily to millions of people in an ever-increasing drought made worse by the changing climate.
Therefore, I am attracted to all things wet, and sustainable, that provide life, and energy, and sustenance to a growing worldwide population. Meanwhile the supply of fresh, clean water becomes more limited over time due to increasing demands from a growing population.
In fact, a report from the World Economic Forum states:
The gap between global water supply and demand is projected to reach 40% by 2030 if current practices continue. In many places, demand is already exceeding sustainable supply, and in others, water scarcity is hindering economic growth. Water insecurity risks triggering a global food crisis, while economic growth and more unpredictable weather patterns increase competition for access to water, impacting citizens, farmers, industries and governments.
I am also a big believer in natural resource conservation and preservation (i.e., sustainability) and making best use of available resources for energy development. I believe that renewable energy sources are the wave of the future and are becoming more economically feasible as new innovations in wind, solar, geothermal, and other forms of renewable energy and battery storage are developed. My first professional job was with Chevron, and I understand the need for petroleum resources, but the world is changing and as a global society we must adapt.
And thirdly, I am witnessing firsthand a trend toward more diversity, inclusivity, and equity in the workforce and in corporate goals and commitments worldwide. This set of attributes is commonly referred to as ESG (environmental, social and governance) in the investing world. PIMCO, one of the world’s largest companies that offers a variety of fixed income funds, returns 19 results when searching for ESG offerings.
Today I am writing about a fund called Ecofin Sustainable and Social Impact Term Fund (TEAF). I believe that TEAF is a good potential investment for growth and income over the next 9 years that is focused on ESG types of investments.
Sustainable Investing and ESG funds
The United Nations has defined 17 Sustainable Development Goals that you can read more about here. Several of those goals have direct economic impact and include Climate Action; Industry, Innovation, and Infrastructure; Affordable and Clean Energy; Clean Water and Sanitation; Responsible Consumption and Production; and Sustainable Cities and Communities.
Investing in ESG funds has become somewhat of a new trend for many fund providers. For example, Invesco touts itself as the 2nd largest ESG ETF fund provider. Natixis Investment Managers published a white paper, titled “Everyone’s on the ESG Investing Bandwagon”. In that paper it describes how 2020 changed the investment environment for ESG investors:
In 2020, ESG strategies broke several records:
• Brought in record flows of $152 billion
• Reached record asset levels of $1.6 trillion
• Drove a record number of 196 product launches
There is growing evidence that ESG funds are not just a fad or a current trend. Many investment options are now focusing on ESG initiatives and are recognizing that younger investors are especially very interested in investing for the future, and ESG types of funds cater to those demands.
Both institutions and fund selectors are increasingly interested in ESG funds as depicted in this chart:
Another recent example of ESG investing popped up on my radar while I was doing my research for this article. Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) is pursuing a $3.9B Wind and Solar development project in Iowa. According to the news story, that project would supplant the already substantial investment in wind energy that has taken place in Iowa since 2006:
The project would bolster Iowa’s already significant wind market. In 2019, the state generated 41% of its total energy needs from wind, up from just 5.1% in 2006, according to the Iowa Utilities Board.
And one of the best indications that ESG investing is here to stay comes from Larry Fink, CEO of BlackRock, in his 2022 Letter to CEOs:
It’s been two years since I wrote that climate risk is investment risk. And in that short period, we have seen a tectonic shift of capital.3 Sustainable investments have now reached $4 trillion.4 Actions and ambitions towards decarbonization have also increased. This is just the beginning – the tectonic shift towards sustainable investing is still accelerating. Whether it is capital being deployed into new ventures focused on energy innovation, or capital transferring from traditional indexes into more customized portfolios and products, we will see more money in motion.
I recently learned of this relatively new (inception date March 2019), term-limited, closed end fund, TEAF, from Ecofin that holds assets in its portfolio that embrace several of the SDGs identified by the UN report. The fund looks promising for the potential total return based on capital growth and income that it offers between now (January 2022) and March 2031 when the fund terminates, 12 years after its inception date.
Other authors on SA have written about this fund in the past, including Nick Ackerman who last wrote about the fund, and its persistent discount to NAV, in September 2021. This is my take on the fund and my belief that it is worthy of further investigation as a limited-term growth and income investment opportunity.
From the fund’s fact sheet, the fund is designed to provide:
- Attractive total return potential with emphasis on current income and uncorrelated assets
- Access to differentiated essential assets investments
- Investments in tangible, long-lived assets and services
- Ability to make a positive social, environmental and economic impact
- One 1099
- Expertise of Ecofin, a leading sustainable manager
The primary objectives of TEAF are to provide a consistent, managed distribution of 7% of NAV based on a portfolio of differentiated assets that are mostly uncorrelated to S&P 500 equities, and that include both private and public holdings focused on sustainable and energy infrastructure, and social impact.
The fund was originally launched as Tortoise Essential Assets Income Term Fund, and thus the TEAF ticker. The fund manager is Ecofin, and on June 16, 2021, the name change was announced effective June 30, 2021. Ecofin is a subsidiary of TortoiseEcofin:
Parent company, TortoiseEcofin has approximately $8.5 billion in assets under management through a family of registered investment advisors as of 12/31/2021. Ecofin Investments, LLC is the parent of registered investment advisers Ecofin Advisors, LLC and Ecofin Advisors Limited (collectively “Ecofin”). Ecofin has approximately $1.7 billion in assets under management as of 12/31/2021. The remainder is comprised of Ecofin branded products or products managed by the team through an affiliated adviser.
Who is Ecofin?
Ecofin is described as the bridge connecting Ecology and Finance.
Ecofin focuses specifically on Climate Action, Water and Environment, and Social Impact in its fund offerings and other investment vehicles. TEAF is the single CEF offering from Ecofin. This is the stated investment strategy for TEAF:
“TEAF seeks to provide a high level of total return with an emphasis on current distributions. TEAF provides investors access to a combination of public and direct investments in essential assets that are making an impact on clients and communities.
The Ecofin brand was created in 2020 after Tortoise Capital rebranded its sustainable-focused investing strategies. The Tortoise brand still focuses on power and energy infrastructure and energy evolution. Long time energy investors are likely familiar with several of the Tortoise offerings including 5 funds that are listed in the fund screener from CEFConnect:
Why TEAF and Why Now?
This fund is not suitable for all investors due to its term-limited nature, and its past performance has not been stellar, although the fund did return 19.38% in calendar year 2021, according to the fund fact sheet. And as of January 19, 2022, the fund announced a 12.5% increase to its distribution, raising it from a previous monthly payout of $.075 to $.09. At the closing market price of $15.09, the dividend yield amounts to 7.15% annually.
Total assets in the fund amount to $260M including leverage, as of 12/31/21. Total number of holdings = 58. Monthly distributions of $.08 will be paid in January and February 2022, with the amount rising to $.09 beginning in March.
As of 1/18/22 the NAV for the fund is estimated at $17.19 which means the market price is trading at about a 12% discount. Current leverage utilized by the fund manager is down to 9.4% of total assets according to the fund overview.
When Nick wrote about the fund back in September the fund was trading at about a 17.6% discount, so the discount has narrowed considerably in 4 months. Looking at the CEFConnect site, you can visualize the pricing history and see the discount narrowing:
As the fund gets closer to its termination date, the discount is likely to narrow further as the market price closes in on NAV.
As I began to delve into the fund, one of the features that is attractive to me as an investor is the mix of private and public sector holdings.
Some of the private sector holdings include large solar energy assets, currently consisting of 17 solar projects spread across 6 states. Those private solar holdings, Renewable Holdco I and II, are the 2 largest positions in the portfolio as shown in this snippet from the fund fact sheet:
The private holdings, which represent nearly half of the overall portfolio, also present a dilemma for investors because the ability to determine fair value is based on the company’s internal estimates.
From the fund’s statement of additional information sheet:
We seek to achieve our investment objective by investing, under normal conditions, at least 80% of our total assets (including assets obtained through leverage) in issuers operating in essential asset sectors. We consider essential assets to be assets and services that are indispensable to the economy and society. Essential asset sectors include the education, housing, healthcare, social and human services, power, water, energy, infrastructure, basic materials, industrial, transportation and telecommunications sectors. We may invest across all levels of an issuer’s capital structure and emphasize income-generating investments, particularly in social infrastructure, sustainable infrastructure and energy infrastructure.
The fund utilizes a variety of investment strategies including direct investment, covered call options on between 10 to 30% of listed securities, private debt securities including municipal bonds, non-US securities, and corporate debt securities among others.
In 2021, Ecofin made several additions to the fund that are summarized on the Deals Summary page of the fund’s website:
Looking at some of the details, the two senior living deals include 11% cash yield on the debt investments via secured subordinated notes. Dynamic BC Holdings is a subordinated secured note debt investment in a bioenergy company that produces Renewable Natural Gas and pays a 13% cash yield.
Those are just a few examples of “social impact” investments that are included in the TEAF portfolio holdings.
Risks to Thesis
Investors in traditional energy funds like the Tortoise funds have been unable to realize positive returns on their fund holdings over the past five years, and many of them have experienced significant negative returns. In fact, of the 5 Tortoise funds shown above, only Tortoise Power & Energy Infrastructure (TPZ) had a 5-year total return that was only slightly negative at -2.6% based on NAV, at least according to CEFConnect.
Comparing TEAF with TPZ and Energy Select Sector SPDR ETF (XLE), which represents the overall energy sector, total returns over the past 3 years (since inception of the TEAF fund) with dividends reinvested have been comparable.
The energy sector overall started to recover in 2021 and looks poised to continue its recovery in 2022, however, risks remain due to the hangover effects of the Covid pandemic and resulting economic impacts. Sustainable energy investments are on the rise but could slow down again if the economies of developing countries do not resume the growth cycle that began last year.
Political risks, such as the resistance to pass the Build Back Better bill in Congress, could derail the progress that has been made over the past 2 years in sustainable and renewable energy investments in the US, which could then have ripple effects into other global economies.
There are also the unknown, “black swan” type of risks that are ever-present in our new post-pandemic world like a missile attack from North Korea, or a massive undersea volcano that could wipe out entire countries. It is difficult to plan for such a risk, and it would impact all sorts of investments, regardless.
To summarize my investment thesis, I believe that TEAF is a fund worth investing in for the next 9 years, due to the term limit nature of it. The past 3 years, since March 2019 when the fund was created, have not been good for the energy sector as a whole, and TEAF with its history as a Tortoise fund, suffered along with the rest of the energy sector.
Going forward there is a renewed and keen interest in ESG investing, globally and increasingly in the US. The move toward sustainability, environmental, and governance goals of capital investments is only going to continue to grow, especially as younger investors enter the markets.
TEAF appears to be well positioned to take advantage of both the recovery in the overall energy sector, and the ESG movement. The fund still trades at a 12% discount to NAV, which is growing as new investments are made. With a monthly distribution of 7% there is steady income coming in while the growth continues and the discount to NAV closes as it gets closer to the end of the 12-year term in 2031.
This is not a buy and hold forever investment, nor is it one for a conservative investor as there are risks involved. But for me personally, and others who want to capitalize on an investment in our global future in ways that make a positive social and environmental impact, I believe this fund is worthy of consideration.
So if you meet me, have some courtesy
Have some sympathy and some taste
Use all your well learned politics
Or I’ll lay your soul to waste”