Results analysis: Jupiter Green

• In the six months to 30/09/2023, Jupiter Green (JGC) delivered a NAV total return of -10.0% and a share price total return of -11.4%. In comparison, the trust’s benchmark, the MSCI World Small Cap Index, increased by 0.1% over the period.
• The challenging macroeconomic environment weighed on the trust’s performance during the period, with the threat of ‘higher for longer’ interest rates prompting a deterioration in investor sentiment towards growth equities. A headwind to environmental solutions equities was the UK government’s push-back in net-zero targets for the phasing out of gas boilers and non-electric vehicles.
• The trust’s discount widened from 12.7% to 18.6% during the period and has subsequently widened again to 20.6% since the period end. The board has used share buybacks to manage the trust’s discount, buying back £1.9 million of shares at an average discount of 15.9% to NAV during the period.
• The largest positive contributor to performance was the sustainable oceans and water systems theme, including investments in Advanced Drainage Systems and Green Buildings and Industry. The main detractor to performance was in the clean energy category, despite long-term secular growth drivers for renewable energy and associated infrastructure.
• Chairman Michael Naylor said: “We are disappointed with the performance of the portfolio over the period, however due to the prevailing macroeconomic environment, we are of the belief that the prospects for the portfolio companies and their respective addressable markets remains undimmed. As attitudes toward addressing climate solutions shift, there is a broadening of the value chain beyond the conventional lens. The opportunities throughout the market that this creates will be plentiful and we firmly believe the Jupiter Green Investment Trust remains well-positioned to identify them.”

Kepler View

Jupiter Green (JGC) has a broad-ranging remit to invest in companies providing solutions to environmental challenges from across the global investment universe. Manager Jon Wallace has identified six key themes that underpin the trust’s investing strategy, with around 70% of the portfolio allocated to the circular economy, clean energy and green buildings and industry (as at 30/09/2023).

Jon has flexibility to invest across the market cap spectrum but has a bias towards smaller companies as major innovators of environmental solutions. The portfolio is heavily skewed towards ‘accelerators’ (delivering proven sustainable solutions) followed by ‘established leaders’ and a small proportion in ‘innovators’ of technology solutions.

The environmental sector offers strong long-term growth drivers, reinforced by recent events. The invasion of Ukraine prompted a renewed focus on energy security, and the role of renewables in diversifying energy mix. There has also been increasing regulation in the sector, including the US government’s landmark commitment to investing in clean energy and other environmental solutions in the US Inflation Reduction Act (IRA) last year. And in the last few weeks, the COP28 summit in Dubai has prompted a wave of new international pledges from UN members on decarbonisation, food security and climate change.

We think the accelerating pace of regulatory change is supportive of the investment thesis for environmental solutions companies, despite the challenge of rising interest rates for capital-intensive businesses over the last year. It’s also an area that benefits from active management by experts that can identify the likely success stories amongst a large group of innovators targeting different themes. As a result, JGC’s portfolio and performance can diverge significantly from its benchmark, the MSCI World Small Cap Index.

Looking at JGC’s top three holdings (at the period end), Veolia Environnement provides water, waste and energy management systems in the circular economy theme while Schneider Electric manufactures energy-efficient electrical power products for car chargers and other electrical systems in the green industry space. Lastly, Prysmian is a provider of cable technologies for upgrades of electrical power grids, which are set to play a key role in the transition to clean energy. We think this illustrates the diversity of the themes in the portfolio.

Despite a challenging half-year, JGC has delivered a strong long-term performance for investors, with a five-year NAV return of 38.4% (as at 17/12/2023). However, it continues to trade at a significant discount to its closest peer, Impax Environmental Markets, as shown in the chart below.

A reversal in the interest rate cycle and improvement in investor sentiment towards small-caps could provide the impetus for a recovery in valuation. Given that environmental solutions are likely to remain at the forefront of regulation and global development, the current discount may prove an attractive entry point for investors wanting exposure to an actively-managed trust in this sphere.

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