Impax Environmental Markets 26 October 2021
Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by Impax Environmental Markets. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
Impax Environmental Markets (IEM) is the standard bearer for sustainability-focussed trusts. For nearly two decades, it has offered exposure to mid- and small-cap companies exposed to the transition to a more sustainable economy. The last few years have seen what has historically been a niche area of investment finally become mainstream. IEM has ridden this wave of investor enthusiasm, reflected in both strong NAV performance relative to world equities, but also a discount giving way to a premium rating.
The Impax team are fundamental stock pickers that invest in growth companies using a disciplined investment process and a strong valuation overlay. Mindful of the risks presented by current higher valuations, they are aiming to position IEM for defensive growth. When we caught up with the managers recently, they commented that they have never been more convinced of the long-term case for their strategy.
With markets performing strongly, the team have been more active in terms of turnover than historically. The team tend to trim their exposure of more expensive holdings, recycling capital into better valued prospects. Whilst wary of overall valuations, the team report being reassured by the portfolio’s underlying earnings continuing to grow faster than the wider market. This is in line with the historical pattern, in which IEM’s portfolio has delivered stronger underlying earnings growth relative to the wider index.
Higher valuations are a factor in the managers’ reluctance to employ gearing, and IEM has net gearing of c. 1.4% currently. Investor demand for what is a capacity constrained strategy has seen the premium at which the shares trade expand to c. 5%.
Impax Environmental Markets (IEM)’s run of form continues, with strong outperformance of world equities so far this calendar year (2021) extending good relative outperformance achieved in 2019 and 2020.
The growing popularity of sustainability as an investment theme, combined with growing recognition of Impax Asset Management as a leader in this space with a depth of experience not found in many other managers, means that we think shares will likely continue to be in demand.
IEM invests in mid- and small-cap companies in a niche that is becoming increasingly popular. The managers and board are therefore capacity-constrained, which has led to constraints on the number of shares that can be issued. This has led to a consistent premium rating, which shows no signs of abating.
IEM offers an attractive package, but the premium to NAV of 5% does present risks over the short term. Other short-term risks also remain in the form of portfolio valuations being higher than historic averages. For long term investors, in our view IEM remains attractive as a highly differentiated proposition to most global funds and trusts.
|Niche investment strategy which has delivered strong outperformance
|Portfolio trading on a higher premium to wider markets than historically
|Strong historic underlying earnings growth provides evidence of manager’s stock picking skills
|Exposure to industrials and cyclicals could leave IEM vulnerable to an economic slowdown
|Specialist, well-resourced manager
|Trading on a premium to NAV