Impax Environmental Markets 26 March 2019

Impax Environmental Markets (IEM) seeks to invest in companies which will benefit from the ever- increasing need for resource efficiency, focusing on companies which operate in the water, energy, waste management and food / agriculture sectors.

IEM’s manager, Impax Asset Management celebrated its 20-year anniversary in 2018, and IEM was launched fairly early on in the company’s history. With global populations rising, Impax was founded on the thesis that companies which help humanity achieve more with less will benefit from a long-term secular tailwind. Impax aims to “anticipate the second bounce of the ball”, and enable clients to benefit from superior earnings growth, but also a re-rating from being early into specialist small and mid-cap companies located all around the world.

IEM’s portfolio companies must have at least 50% of their revenues exposed to what the Impax team view as “environmental markets”. Current themes in the portfolio include connectivity within manufacturing processes (aka Internet of Things) and Biochemicals. Another emerging trend that is rapidly becoming mainstream is that of electric vehicles (EV). Many generalist investors aim to play this theme, but in many cases use rather “blunt” instruments – such as Tesla shares – which the Impax team view as too expensive for their valuation driven investment methodology. For Impax, this is part of a much larger electronics theme which they have been investing in for three years through electronic controls, and energy efficiency.

Impax Asset Management’s thesis is reflected in the numbers. According to Impax their “Environmental Stocks” universe have grown earnings over the past five years by 7.9% pa, compared to average earnings growth for the MSCI ACWI of 3.3% pa. Moreover, forecast 12-month earnings growth for the IEM portfolio is 11.3%, against MSCI ACWI growth of 5% (Source: IEM Factset 31st Dec 2018).

Underpinned by strong fundamentals, NAV total return performance over the last 15 years has been very strong. Within this, there have been several distinct periods of outperformance. Assuming the manager’s strong run continues further into 2019, the five-year numbers will start to look very strong once again, given the trust outperformed in 2015, 2016 and 2017. One explanation for this strong run could be, finally, a broader appreciation amongst mainstream investors of the themes that Impax has been highlighting (and investing along) for so many years.

The trust currently trades on a premium of 1.2% (21st March 2019). IEM has seen a significant improvement in demand for shares, such that the board have felt able to bring in their discount target from 10% to an expectation that they will seek to maintain the share price at or close to NAV (in normal market conditions). With cash of c 2%, the current level of net gearing is 4%, according to Morningstar, reflecting the manager’s positive outlook on prospects, underpinned by their expectation of strong earnings growth from the underlying portfolio companies.

IEM offers exposures that are unlikely to be found in a material way in any generalist global funds or trusts and will complement most existing funds in an investment portfolio.

The managers have carved out a niche in an area that demands expertise, and in our view the managers fit well into the ESG universe for all the right reasons. ESG analysis is fundamentally bedded into the investment research process, as well as the core investment thesis. The team have been believers for 20 years now, and as such can be seen to have a depth of experience in sustainable investment which few others can rival.

The performance over the last few years has shown the benefits of investing ahead of the curve, and taking a long term, low turnover approach. As we highlight, outperformance during calendar years 2015, 2016 and 2017 will mean five-year relative performance will soon start to look very strong indeed.

The fundamental drivers which have driven this performance show no signs of slowing down. As such, whilst the portfolio has a cyclical tilt and associated risks according the trajectory of the global economy, Impax’s portfolio should be well positioned to benefit from disruption and innovation across a range of sectors and industries.