Impax Environmental Markets 04 December 2018

Generating good long-term investment returns is often predicated on long term thinking. Impax Environmental Markets’ investment objective is unequivocally aligned to this. The team seek to exploit their informational edge in small and mid-cap stocks in the energy, water, waste & resource recovery, and food and agriculture sectors.

By being specialists in niche areas, Impax often find themselves very familiar with the investment universe and already fully invested, at a point that a “new” investment theme arrives on the horizon for mainstream managers. As such IEM offers exposures that are unlikely to be found in a material way in any generalist global funds or trusts

One such company, held at launch and in the portfolio today is Tomra. Tomra is now the dominant supplier of machinery to tackle the “war on plastics”. Reverse Vending Machines (RVMs) are probably the only way for countries to achieve EU targets for 90% recycling under the EU Plastics Strategy. Tomra’s R&D efforts have meant that they are now world leaders in robotic vision and sensing equipment, which has seen them expand their end markets significantly.

Tomra is a good illustration of how Impax invest ahead of the crowd. As at 31^st Dec 2006 Impax was the 16^th biggest investor in the company, at a point when 34.9% of the company was held by “foreign” (ie non-Norwegian) entities. As at 31^st Dec 2017, Impax was the tenth biggest investor and 77.3% of the company was owned by “foreign” entities. We believe this underlines how IEM provides a very differentiated exposure, and will complement most existing funds in an investment portfolio.

IEM has been a strong performer for much of the last five years. The NAV has performed relative to the MSCI ACWI, but also relative to global generalist peers in the investment trust and open-ended sectors. Until January this year, the trust was outperforming both the benchmark and peer groups. However, during 2018 IEM has struggled thanks to a combination of small cap underperformance (especially a lack of large cap tech), being overweight industrials and no healthcare, as well as being underweight $US. The portfolio has also experienced weakness in the lighting and water utilities sectors which have contributed to the benchmark headwinds.

IEM recently adjusted its gearing arrangements, replacing a flexible revolving credit facility with a fixed rate loan. It now has a five-year fixed rate loan of £15m and US$20m, with interest rates on the loans of 2.910% and 4.504% per annum respectively. The current level of net gearing is 4%, according to Morningstar.

IEM’s rerating continues. It would seem that investors have finally sat up and taken notice of the excellent performance and differentiated proposition. Having bought back 10m shares over the first half of 2017, the board have not had to enter the market since then. The discount has narrowed in considerably of its own accord, and the shares now trade at a premium to NAV of 2.3%.

IEM is a highly differentiated mid and small cap trust, offering exposure to niche businesses around the world which are unlikely to be found in a material way in other funds held in a portfolio. The managers have carved out a niche in an area that demands expertise. 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.

The ever-increasing focus on resource efficiency and tighter environmental regulations applied around the world show no signs of slowing down, and Impax’s portfolio should be well positioned to benefit from disruption and innovation across a range of sectors and industries. As we have seen in the recent performance, the portfolio has a cyclical tilt, which introduces some risk according the trajectory of the global economy. However, the managers remain optimistic on their companies continuing to deliver stronger earnings growth than the wider market, and expect continued M&A activity within the sectors they favour.