A number of closed-ended funds investing in renewable energy have sprung up over the past couple of years, promising yields of up to 6 per cent. Many investors have been rushing to take advantage of these products, encouraged by large government subsidies for the sector which suggests their income stream will be reliable.
However Tan (pictured) says that the trusts could be particularly at risk when interest rates rise.
He also warns that less of the funds’ revenue comes from government subsides than many investors believe.
"My take is they do serve a purpose but only because of the exceptional environment we are in," he said.
"If you take the fact that interest rates won’t rise until 2017, as the BOE says, if you are going to see savers having their savings eroded away by negative real interest rates, there’s a case for holding those for a little bit longer."
"But the point to make here is that once people even get an inkling interest rates are due to rise, as soon as expectations turn, those funds could fall out of favour very quickly."
The £311m Renewables Infrastructure Company, launched in July, intends to pay out 6p in its first year, which would correspond to a 5.7 per cent yield on a share price of 103.75p.
The trust is trading on a 4.5 per cent premium, however, underlining the strong demand for that sort of payout.
Performance of trust vs sector since launch
Source: FE Analytics
The fund invests in a portfolio of onshore wind and solar power assets, and is run by InfraRed Capital Partners, which is also responsible for the HICL Infrastructure trust.
All of its assets are 100 per cent owned by the fund, and all holdings are bought after they have been constructed.
Greencoat UK Wind floated in March and focuses exclusively on wind power. The £260m trust is aiming for a dividend of 6p on a share price of 103p, equivalent to a 5.8 per cent yield.
Performance of trust vs sector since launch
Source: FE Analytics
It is currently trading on a premium of 1.58 per cent. Bluefield Solar Income, specialising in solar power, is trading on a 3.6 per cent premium.
Performance of trust vs sector since launch
Source: FE Analytics
The latter's IPO was in July. It was slow to invest its funds, offering a dividend of just 4p at the moment, which, on a share price of 101.5p corresponds to a yield of 3.94 per cent.
Tan warns that while the headline yields may seem attractive, the premiums represent a real risk. He adds that the vast majority of investors would be better off looking elsewhere.
"For most investors, especially people with long-term liabilities like pension funds, they are looking at them as government risk and 'I am being paid 7 per cent against 3 per cent on a 15 or 20 year gilt'," he said.
"Retail investors tend to get the short end of the stick, they tend to be the last to jump on the wagon."
"If you are buying on a premium, it’s probably because you need something with a yield unless you are prepared to hold for the very long-term."
"If you are an institutional investor you tend to play on your liabilities for the long term."
"If you get into these infrastructure or renewable energy funds, you need to take a long view and be prepared to take a hit, because they could go from a 10 per cent premium to a discount once benchmark rates go from 3 to 5 per cent."
Tan says that investors need to be sure of the managers of the trusts they are investing in too.
He rates the managers behind the Bluefield Solar Income fund, who say that the prices being paid for the underlying assets are very different between managers.
"They point out that the incomes [from the assets] are so fixed and certain that the return depends on what you pay for it up front."
They also warn that about 60 per cent of the income depends on brown – or market – energy prices.
Investors who think they are getting a government-guaranteed revenue stream through subsidies may not be getting what they think.
This is particularly important considering the development of shale gas in the US and the current attempts to develop it over here.
A new and cheap energy source could depress market prices and hit the income that these trusts depend on for their yield.
The analyst warns that the trend for these funds is worryingly reminiscent of the trend for emerging market debt funds which sprung up two or three years ago.
Emerging market debt funds were severely hit during the emerging markets crisis over the summer. The macro environment changed as the market began to believe rate rises were on the horizon and the funds saw a huge sell-off and massive redemptions.
"Two years ago all the charts being put in front of me said emerging market debt would only go up in a straight line," he warned.