Impax Environmental Markets 08 March 2022

Impax Environmental Markets (IEM) is a specialist trust with a focus on mid and small-cap growth companies in the new energy, clean and efficient transport, sustainable food, water, circular economy, and smart environment sectors. Long-term, IEM’s managers hope to outperform wider equity markets through their stock picking, allied to the ability for smaller and mid cap companies to compound growth faster than larger ones. Impax’s edge is their specialist knowledge of companies exposed to secular growth themes.

Historically, company fundamentals including strong earnings growth ahead of wider markets, have driven excess returns. However, the period since the start of the pandemic has led to robust NAV returns from the portfolio. IEM’s NAV total return since the start of the pandemic has been 32.9%, against 20% for MSCI ACWI. Over a longer time frame of five years, Performance is no less impressive, with IEM sitting third in the AIC Global peer group.

IEM’s managers have a strong valuation element to their investment process and a focus on fundamentals. This means that significant changes to the portfolio are rare and that some holdings will be a feature for many years. Manager Jon Forster comments that on an underlying basis, IEM’s portfolio companies have so far continued to hit earnings guidance. Indeed, in Q4, the Portfolio performed better than the market was expecting.

IEM has achieved its returns with higher risk characteristics. We attribute IEM’s higher volatility with the fact that this is a mid and small-cap portfolio, but it is also significantly exposed to cyclical sectors such as industrials. The managers seek to mitigate risks by maintaining a diversified portfolio. Statistically, the extra risks taken by the manager over five years have been rewarded with a significantly higher return.

IEM’s managers have a depth and breadth of experience second to none in this specialist space. One of the defining characteristics of the IEM strategy is its focus on innovative small and mid-cap businesses. These are companies that are not usually on the radar of generalist investors, and with the secular growth trends they are exposed to, IEM’s Portfolio is distinctly different to other global funds.

The exposure to these mid and small-cap companies necessarily means that the strategy is capacity constrained. That the manager has been assiduous in protecting itself and clients from the significantly increased demand for Impax’s funds is encouraging evidence of a management group looking to benefit from a successful relationship with its clients/investors over the long term.

For quite some time, IEM has been trading at a significant premium to NAV. Far from not being justified, this is merely representative of IEM’s rarity, offset with the board’s inability to issue shares given the manager’s limited capacity. As we warned at the time, as alluring as the investment themes behind IEM might seem, investors should always be wary of such a premium to NAV. Recent market moves have meant IEM’s premium has eroded, and we see it as reassuring that the board recently bought some shares back at a c. 6% discount to NAV. Currently trading at a 1% premium to NAV, we see this as a potentially interesting entry point.