Returns generated by The Finite Solar Finance Fund (SOLRX) will come to investors as distributions and realized capital gains from share redemptions.
Below, we explain the terminology that describes how SOLRX generates returns and how they accrue to our shareholders.
How SOLRX aims to generate returns
SOLRX pursues two primary strategies to achieve the Fund’s investment objective: investments in private solar assets, and investments in public solar securities.
We’ll cover each at a high level here for the purposes of explanation, but you can find more details on our Investment Strategy page or within the Fund’s prospectus.
Private solar assets
The private assets in which SOLRX invests are, generally, loans that homeowners and businesses have used to finance their purchase of solar power systems to power the places where they live and work. The loans are structured to replace unpredictable utility bills with a fixed monthly payment that lowers the borrower’s overall electricity costs. Here’s a hypothetical example:
When the borrower makes payments, they pay back a portion of the loan plus some interest. SOLRX counts that interest as investment income.
Public solar securities
Public solar securities are stocks and bonds issued by publicly traded U.S. corporations that primarily operate in the solar industry.
That could mean they sell solar hardware and software, sell the labor and expertise to install solar power systems, or manage solar power systems and sell the power itself.
If the Fund buys a solar security and its market price increases, that represents capital appreciation. If the solar company that issued the bond or stock pays the Fund dividends from its operating income, that’s another source of investment income.
How SOLRX will pass returns to investors
Now that we’ve covered how the Fund seeks to generate performance, let’s look at how that performance finds its way to shareholders.
Investment trusts like SOLRX – those that elect to be taxed as registered investment companies (RICs) in particular – will distribute nearly all of their net investment income to shareholders. Distributions, however, can be generated from three distinct sources:
Distributions from net investment income are distributions funded by the income generated from investing in interest-bearing loans, and securities that pay dividends to the Fund. The Fund intends to issue these to shareholders quarterly, and they’re taxed as regular income. The Fund will automatically reinvest these distributions into shareholders’ accounts unless they opt for cash payments.
Distributions from long-term capital gains happen when the Fund holds a security for over a year that appreciates in value before the Fund sells it and passes the gains to investors. If these do occur, they don’t usually happen more than yearly, and are taxed as capital gains.
Return of capital distributions happen when the Fund returns a portion of shares back to investors. These aren’t necessarily a bad thing, but the Fund aims to provide distributions from earnings and capital gains wherever practical.
Realized capital gains from share redemptions
SOLRX is intended as a long-term investment, but we expect to provide quarterly liquidity opportunities for investors who are ready to convert their shares into cash.
If you buy Fund shares at a certain net asset value (NAV), and you redeem them at a later date for a higher NAV, then you have realized the capital gain from your Fund investment. The difference in the value of your shares between those dates would be taxed as capital gains.
We hope this primer helped you understand the mechanics of how SOLRX was built to create value for shareholders. You can always check out our quarterly investor letters for a deeper dive on our investment strategy.