Impax Environmental Markets (IEM) seeks to invest in companies which will profit from the transition to a more sustainable economy; a concept that is now firmly accepted but has not always been.
Underpinned by strong earnings growth from the underlying portfolio, NAV performance has been strong historically. Over five years the trust has delivered NAV total returns of 82%, compared to the MSCI ACWI total return of 70.7%.
2020 has been something of a rollercoaster ride, and IEM has not been exempt from the impact. The managers note that the trust’s underperformance during February and March was due largely to small and mid-cap exposure; but also to cyclical exposures in locked down industries, especially automotive, as well as underweight healthcare and the US dollar. Positives have been the exposure to renewables, software and energy efficiency.
As we note in the Portfolio section, lessons learned from managing the trust over the past 18 years have enabled the team to hold their nerve in the volatile conditions, and helped the trust to rebound more strongly than the market. IEM’s portfolio has a definite growth bias. However the managers are valuation-driven in their stock picking approach. The market volatility enabled them to initiate positions in several new companies, which previously had valuations that the team considered too rich.
A combination of new holdings, as well as sticking to fundamentals, has enabled IEM to bounce back strongly – which we discuss in the Performance section. The managers believe that COVID-19 provides more long-term support for environmental protection, as demands for ‘Building Back Better’ seek to embed low carbon energy systems and cleaner air in cities.
In a traditional sense, Impax Environmental Markets’ (IEM) portfolio represents a global small and mid-cap portfolio but with growth characteristics. Many of the underlying companies are very specialist, and as a result IEM offers exposures that are unlikely to be found in generalist global funds or trusts.
The central investment thesis behind IEM is that the global economy is in transition from a depletive economic model to a sustainable one; in which growth is achieved with improved social and environmental outcomes. From a sustainability perspective – as well as for investors looking for a secular growth theme – IEM offers an attractive proposition.
Strong performance from the manager, and a good alpha score over five years, mean that IEM is now trading consistently at a premium and is issuing shares (see Discount section). The trust has net assets of more than £700m, having issued shares worth >£100m year to date. The tiered fee structure should mean that the OCF will continue to edge down, as further shares are issued.
The trust’s performance over the last few months has shown the benefits of having an experienced manager who can navigate harder times. Performance has been strong both relative to both the wider equity market and the Global Investment Trust sector. The fundamental drivers which have underpinned this performance show no signs of slowing down. Consequently we believe IEM should be a consideration for long-term investors looking to add specialist expertise to their portfolios.
|Niche investment strategy, increasingly en vogue, with trust now issuing shares||Portfolio tends to have higher beta, and higher volatility than the market|
|Strong historic underlying earnings growth gives credence to the investment thesis||Structural gearing likely to exacerbate portfolio volatility|
|Specialist, well-resourced manager||Trading on a premium to NAV|