Future's bright for LED makers, says Bruce Jenkyn-Jones

Impax Environmental Markets investment trust managers Bruce Jenkyn-Jones and Jon Forster have been buying more LED lighting shares as they expect strong growth in the sector to continue this year.

After a tough year in which the bias of the fund towards smaller companies saw it suffer as global growth fears dampened risk appetite, the fund started 2012 strongly, returning 11.2% compared with a 4.4% rise in the FTSE ET50 index at the end of February. However, by 17 April the performance in the year had fallen back to a 2.7% gain, compared with 1.8% by the benchmark index.

Industrial, construction and commodities companies, as well as Asian stocks, helped the trust to outperform as the ECB’s 'LTRO', or money-printing, programme helped boost investor appetite in the first two months of 2012.

Top-10 stocks such as insulation products specialist Kingspan (KSP.L) and electrical motors producer Regal-Beloit have been strong performers after posting impressive fourth-quarter results.

Forster said that the LED market endured a tough 2011, but had started 2012 strongly as oversupply issues had subsided on strong demand for LED components for TVs in particular.

The duo have added two key players in the market, Aixtron and Cree, to their existing 4% stake in UK rival Dialight (DIAL.L) and their largest LED holding, Epistar.

Renewables at historically low weighting

The LED subsector falls within the trust’s energy efficiency theme, which makes up the largest chunk of the £305 million fund at 31% of its holdings. The poor performance of renewables over the past year has seen the sector fall to just 15% of the trust – its lowest level since launch in 2002.

Overall, the fund's other sector allocations are 24% in waste management, 5% in environmental support and 17% in water infrastructure and support. A further 6% is in pollution-control stocks.

Forster said: ‘Last year the headwinds were renewables, poor performance in Asia and energy efficiency stocks. This year we have seen a turnaround in Asia, and the LED sector has had a very strong start to the year.

‘LEDs had a tough time due to temporary oversupply as well as a depressed lighting market. TVs were supposed to be the big new market which led to overcapacity, but now many have been redesigned and the demand for LED components going into TVs has been ramped up. We expect to see accelerating growth in the sector this year.’

Environmental consultancies increased

The duo have been increasing their exposure to environmental consultancies over the past nine months as appetite for resource efficiency has increased.

After two or three years of deratings, Jenkyn-Jones said that environmental consultancies had got down to single-digit price-to-earnings valuations, and that the pair had added to holdings RPS (RPS.L) and Tetra Tech in the sector.