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Trust Insider: why Impax' time has come again

Trust Insider: why Impax' time has come again

About 18 months ago I had a look at Impax Environmental Markets (IEM) and its sister fund, Impax Asian Environmental.

At the time, after a period of disappointing performance relative to world markets, the two funds were out of favour with investors. I thought the problem lay mainly with the asset class and said that, although it was hard to see a catalyst that would trigger a rerating, I did think the investment case for both funds was solid.

The share prices of both funds began to recover shortly thereafter but the Asian fund was hit by selling pressure from a couple of large investors and forced to wind up last summer. Impax is still managing an open-ended version of the Asian strategy but, for now, its only listed fund is IEM.

Altogether Impax manages about £2.4 billion, with about a third of that in renewable energy projects – the sort that might eventually end up in the portfolios of the Renewable Infrastructure fund or Greencoat Wind.

These are not a feature of IEM’s portfolio, however. It focuses on companies that promote energy efficiency, alternative energy generation, sustainable food and agriculture, upgrading water infrastructure – both supply and treatment, managing waste and environmental support services.

The investment case is pretty straightforward. As populations and living standards rise, there is increased pressure to upgrade environmental infrastructure, find ways of cutting pollution and use natural resources more efficiently.

The universe is pretty large (about 950 stocks, collectively many hundreds of billions in market cap). It encompasses all sorts of companies from treating waste water associated with shale gas extraction in the US and UK to aiding efforts to reduce air pollution in China.

Right now, Impax believes most conditions are favourable for further decent performance in 2014. Signs of life in economies such as the US and UK will help boost industrial investment, the construction market and automotive sector. Governments might be strapped for cash but they are recognising that they need to continue to push the environmental agenda.

Impax believes companies in its universe are making decent returns on equity and there is a chance of an uptick in M&A activity in the sector this year. The only real negative is that the sector is not particularly cheap.

IEM’s net asset value rose by 30.5% over the past 12 months. Over the same period its share price went up 39.1% as the discount narrowed to its current level of 11.7%.

At the current share price the fund has a market cap of £346 million and the fund is reasonably liquid. IEM does not pay much of a yield – about 0.6% – but that is what you might expect from a fund invested in relatively fast growing companies. Impax reckons the earnings growth on the portfolio will be about 25% over the coming year (compared to an average of just over 10% for the MSCI World Index).

This growth does not come cheap. At the end of December 2013 the portfolio traded on a price-to-earnings ratio of 18.5x. This is a little higher than the long-run average for IEM’s portfolio but valuations have been moving up across the board and so IEM’s portfolio rating relative to the market as a whole is less than it usually is.

Impax is a long-term investor but is prepared to take advantage of short-term price weakness. Good recent examples of this are its purchases of Abengoa, a biofuel company based in Spain, and Schnitzer Steel, a metals recycler based in the US.

In Abengoa’s case, the weak Spanish economy led to backtracking by the government on subsidies for renewable energy, which knocked share prices of companies exposed to that area.

Impax sees hidden value in the company and thinks both the regulatory environment and the economic backdrop are improving. Schnitzer was hit by falling metal prices but it has a strong market position and is used to coping with volatile market conditions. Impax has been picking up stock at low valuations.

IEM has put some debt financing in place (a two-year sterling and US dollar facility from RBS totalling £30 million), which it will draw down in tranches. At the end of December it had about 1% net cash.

The portfolio is distributed across 67 holdings in a spread of sectors and geographies. At the end of December 2013 the top 10 holdings accounted for around 27% of the portfolio.

They included investments in waste management and recycling (Clean Harbors in the US, which manages oil and chemical waste, and Regenersis in the UK, which is involved in recycling of electronic equipment); energy-efficient construction (Kingspan in Ireland, Nibe in Sweden and Rinnai in Japan); water treatment and infrastructure (Pall, a filter company, and Pentair, a pumps and valves business, both based in the US); industrial energy efficiency (Vacon in Finland); and pollution control (Clarcor, a US-based air filtration company).

Some of these you may recognise but I would bet most will be new to you (unless you are already an investor in IEM).

In addition, the sector has a tendency to produce bubbles, for example, fuel cells, wind turbine manufacturers in the past and today perhaps the likes of Tesla.

I think the environmental sector might be one of those best played by subcontracting investment management to a specialist. Impax, with 28 investment professionals dedicated to the area, is ideally set up for this.

James Carthew is a director of Marten & Co

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