Impax Environmental Markets 01 April 2021

Impax Environmental Markets (IEM) offers exposure to mid- and small-cap companies the managers expect to profit from the transition to a more sustainable economy. The trust has performed very well relative to wider equity markets over the past five years – especially in share price terms.

The managers have a disciplined investment process which they believe has helped them cope with the huge shifts in equity markets seen over the past 12 months. Impax are growth investors but have a strong valuation overlay. At times this leaves them open to the risk that they may lag very strongly performing markets. During 2020 most trading activity was focussed on the second half of the year, with the team trimming companies that had hit price targets. This has set the trust up well on a relative basis since the November news of an effective COVID-19 vaccine.

Historical outperformance has been largely achieved by the portfolio delivering stronger underlying earnings growth relative to the wider index. For 2020, earnings declines were broadly in line with those of MSCI ACWI. However, the managers’ report having seen a positive outcome from Q4 earnings and a reversion to the portfolio’s premium growth expected in 2021.

Valuations have risen; IEM’s portfolio currently has an average P/E of 26x, representing a premium of 38% to the market, compared to a historic average premium of 20%. These higher valuations are a factor in the managers’ reluctance to employ gearing, and IEM has net gearing of c. 2.5% currently. The managers’ report that they remain mindful of the risks presented by higher valuations and are aiming to position IEM for defensive growth.

The Impax team are fundamental stock pickers that invest in growth companies. At the same time, they have a strong valuation overlay. At times, this leaves them open to the risk that they may lag very strongly performing markets by not having exposure to very popular stocks such as Tesla. However, we believe that in terms of generating consistent alpha, a valuation-led investment process is more likely to be repeatable through the cycle than trying to second guess the next ‘hot’ stock.

IEM invests in mid and small-cap companies in a niche that is becoming increasingly popular. As such, it represents a capacity-constrained strategy. The managers have been cautious in managing this capacity, and as such, the board have been issuing shares, but have had to agree to constraints on the number of shares issued. With c. £83m worth of shares available to be issued, this should prevent the premium from reaching the high levels of last year, which is good news for investors.

IEM offers an attractive package, which is reflected in the current premium to NAV of 3%. It is likely to complement other global growth portfolios, which has become apparent this year following the significant sell-off seen in technology stocks. There are short term risks present in the form of portfolio valuations being higher than historic averages. But, for long term investors, IEM remains a differentiated proposition to most global funds and trusts.