Impax Environmental Markets 12 April 2023

Run by a three-strong management team of Jon Forster, Bruce Jenkyn-Jones and Fotis Chatzimichalakis, Impax Environmental Markets (LON:IEM) owns a concentrated global portfolio of small and mid-sized companies, aiming to capture the growth opportunities offered by the expanding need for solutions to the environmental issues the world is facing. These are built on six environmental markets, ranging from renewable energy to sustainable food.

In the past year, the background for the trust has continued to evolve. There has been increased momentum behind new policies for a range of environmental issues, which the managers believe has reinforced the investment case behind the sector. Despite this, activity in the portfolio has been limited. In the first half of 2022, the managers consolidated the portfolio to make it more defensive, but more recently they have been gradually adding more opportunities, including adding the trust’s first direct Asian holding. The managers have also said the bench of approved names is well-stocked (see Portfolio).

The trust’s Performance slipped in early 2022 as the market’s preference switched from the growth style of investing, which IEM primarily focusses on, to value. However, this reversed towards the end of the year and into the first part of 2023, which allowed the managers to recover much of their underperformance. IEM remains considerably ahead of both its global peer group and global index, over the longer term (see Performance).

Despite this, the shares have fallen close to NAV (see Discount). They have traded at a premium for large parts of the past five years, but are now near the level at which the board has indicated it may buy back shares when appropriate to prevent a material discount emerging.

Environmental issues are one of the key areas of focus for governments, businesses and consumers alike. The specialist managers of IEM are investing in companies providing solutions to these issues, which we believe means that IEM offers access to an asset class subset which has growing demand and momentum behind it. These firms have been caught up in the value/growth rotation of the past year, leading to a pullback in relative performance. However, behind the scenes, we understand there have been considerable policy changes, which should provide fundamental support going forward (see Portfolio).

The managers invest in small and mid-sized firms, which we believe should offer purer exposure to these themes, and are often those that perform best in market recoveries. The managers have seen some encouraging signs, such as increased M&A activity and market participation, which could indicate a better year for markets. If this plays out, we believe IEM would be well-placed to capture this trend (see Performance).

As a result of the reversal in market sentiment, the trust is trading at a Discount. Historically, the trust has traded at a sizeable premium due to its limited capacity and has rarely traded at a discount for long periods. As such, we believe this may be seen as a value opportunity to access a trust which has seen its long-term drivers reinforced.