Having been one of the forerunners of the sustainable investment theme, Impax Environmental Markets (IEM) now finds itself in the epicentre of what we believe is strengthened secular growth post-COVID-19. The trust seeks to invest in companies which will profit from the transition to a more sustainable economy. An investment theme that seems likely to run for many years yet.
As we discuss in Portfolio, IEM offers a specialist exposure to mid and small-cap companies around the world within four broad overarching sectors: new energy, water, waste/resource recovery, and sustainable food and agriculture. Interest from generalist investors this year in these areas has resulted in multiples expanding for the portfolio as a whole. On the one hand this might mean enhanced risks for IEM, or on the other hand it might reflect more aggressive ambitions by governments around the world to achieve ‘net-zero’.
This increased interest from investors, combined with strong earnings growth means 2020 has been a hallmark year for IEM. As we discuss in Performance, the trust has outperformed the benchmark by c. 11.5% (to 18/11/2020), and the trust has been a strong issuer of shares with the premium to NAV standing at 9.5% currently.
IEM’s portfolio has a definite growth bias. However, the managers are valuation-driven in their stock-picking approach, which has enabled them to reposition the portfolio since COVID-19 to improve the portfolio’s quality and growth characteristics. IEM’s net gearing remains at c. 2.5% reflecting the managers’ optimism, balanced by caution on the portfolio’s valuations relative to the wider equity market.
IEM’s strong performance and elongated premium achieved this year gives cause for cheer in some senses – certainly for investors who have held the shares over this and longer time frames. 2020 feels like IEM’s moment. Yet at the same time, valuations – both in the underlying holdings and the 9.5% premium that the shares trade - at are potentially signs for caution (as we discuss in Discount).
There are plenty of unknowns out there. As we write, a COVID-19 vaccine rollout seems likely over the coming months, ostensibly a potential boost to all sectors. However, in the event that markets retrench, then IEM will not be unaffected. This could be compounded in share price terms by a normalisation of the premium the shares trade at, which would be painful for investors.
On the other hand, governments around the world are getting more aggressive in their ambitions to achieve ‘net-zero’ in terms of carbon emissions. With fiscal stimulus required (and being promised) on a huge scale, attempts to direct spend towards decarbonizing economies likely provides a strong and lasting tailwind to precisely the sorts of companies that IEM invests in.
The fundamental drivers which have underpinned performance year to date show no signs of slowing down. IEM offers exposures that are unlikely to be found in other funds. Our enthusiasm that IEM should be a consideration for long-term investors looking for specialist expertise is balanced by the significant premium of the shares: any lessening could be a potential opportunity.
|Niche investment strategy which has come of age and performed strongly in 2020
||Portfolio trading on a higher premium to wider markets than historically
|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 large premium to NAV