Green team thrive in a growing field

14 June 2010 | By Tomas Hirst

Impax Asset Management is focused on retaining its niche as an environmental specialist group but the investment theme is becoming progressively more mainstream.

Over the past decade the environmental theme has not only risen in prominence from an investment perspective but is now high on the international political agenda. The combination of swelling support from the public sector and a growing breadth of investment opportunities has driven interest towards the environmental sector.

“We’ve been going for pretty much 12 years,” says Ian Simm, Impax’s chief executive. “I founded the investment management business really because investors saw an opportunity to make very good money from investing in the growth of the alternative energy, water treatment and waste management sectors.”

Since that time the business has expanded and Impax has over £1.9 billion under management. The concept underlying the theme is the belief that environmental awareness and growing pressures on energy supplies posed by the global urbanisation trend should provide significant opportunities for the sector to outperform.

“We believe the original concept still remains valid, which is that these markets are growing more rapidly than the mainstream economy,” says Simm. “The fact that the technology and the policy issues around it can be very ­complicated means that it lends itself very well to active management.” (article continues below)

The flagship fund is the Impax Environmental Markets investment trust, which was £418m in size at the end of April. The trust was set up to provide access to anticipated growth globally across the energy, water and waste sector. Key themes in the fund include alternative energy and energy efficiency, water treatment and pollution control, and waste and resource management.

“The process first of all is bottom-up stockpicking,” Simm says. “We have an investment team of 10 working on the [Environmental Markets] fund and we meet over 300 companies a year around the world, including quite a lot in Asia. We are very focused on looking for growth at a reasonable price. We have a low turnover style and have a diversified portfolio structure so the largest holding rarely goes above 3% of the fund.”

Simon Elliott, the head of research at Winterflood Investment Trusts, says that while the trust had a relatively modest beginning, the Impax team’s reputation has grown over the past decade. “They’re very well known in the closed-ended space,” he says. “The Environmental Markets fund has not been too exciting in terms of its recent performance but Impax are well regarded, which is why they were able to launch another investment trust last year.”

 

Over the past five years Environmental Markets has returned 50.16% to shareholders against an Investment Trust Environmental average sector return of 69.21%.
Elliott says the group has benefited both from the strength of the investments the team have made as well as the relative dearth of competition in the environmental arena. “Probably the nearest competition they’ve got is the BlackRock New Energy trust but that’s a bit more of a pure energy play, which comes with a bit more volatility,” he says. “The Impax fund is set up as more of an all-weather product.”

A key factor that has helped the team at Impax build its diversified portfolio has been the ever-increasing number of companies entering the market.

“When we first started investing in this area with this strategy almost 10 years ago there were about 200 stocks in this universe, and now there are 850,” says Simm. “So there’s been a real explosion in the number of opportunities and therefore it’s become more mainstream. The median market cap of companies in the fund is around $500m (£344m) whereas when we launched it was about $250m.”

These businesses have been strongly supported by government initiatives, including those of Barack Obama, the American president, who has committed to spending over $200 billion on the country’s “clean-energy future”.

Simm estimates that the total global package earmarked for the sector amounts to some $520 billion and unlike numerous areas hit by the financial crisis, governments have stepped up spending on green projects through their fiscal stimulus packages.

“Over the last five years or so there’s been a real acceleration in the markets, which are shaped by regulation and commodity prices,” says Simm.

 

“In that timeframe we’ve seen a real acceleration of private sector spending but we’ve also seen the targets on the public side for carbon reduction and renewable energy increase significantly.”

About 30% of this stimulus investment has already been spent across the world, but that still leaves 70% of the $520 billion to be spent in the coming years.

Green initiatives tend to conjure up images of vast wind farms and glittering expanses of solar panels, but while clean energy does indeed feature in government spending plans, a key short-term beneficiary of this influx of capital is the somewhat less glamorous area of energy efficiency.

“If you’re trying to make money in the next six to 12 months then one of our favourite areas is energy efficiency,” Simm says. “We believe the fundamentals are very robust, the commitments from both the public and private sectors are reliable and the companies are looking pretty cheap. Of our top 10 holdings in the Environmental Markets fund half are in the energy efficiency area.”

Energy power generation, he says, is a longer-term play that should provide good cashflow and a stream of income over the next five to 10 years. Looking even further out, adventurous investors could aim to build a portfolio of investments in private clean-energy technology companies, although this carries with it venture capital risk and plays only a small part in the Environmental Markets portfolio.

One reason that Elliott says he is particularly positive on Impax is that the team appear to have garnered ­support from across the investment spectrum. “Their investor base is a nice balance between private wealth managers, multi-managers and institutional investors,” he says.

Within this eclectic mix are well-known names in the asset management world including the Henderson multi-manager team, with the Impax Environmental Markets fund included in the ­Henderson Multi-Manager Growth portfolio.

“We’ve held the fund for about three and a half years,” says Chris Forgan, an analyst in Henderson’s multi-manager team. “Impax are a dedicated company with a solid investment team who have both a strong academic background and investment experience. Performance has been good and we think the long-term prospects of the “green theme” are promising.”

Because of the environmental theme it would be easy to assume that much of the money coming into Impax is from ethically-focused sources. As the ­Henderson team appear to exemplify, however, this has not proven the case.

“From the outset we’ve had no ethical or socially responsible agenda, we’ve just wanted to make as much money as possible through investing in these industries,” Simm says. “It just so happens that a number of ethical investors like what we do and so we tend to get some money from those sources, but the overwhelming money in the funds that we manage comes from what we like to call red-blooded capitalists.

These red-blooded investors have remained proactive in expressing their investment opinions to the group and Simm says they were instrumental in the decision to launch the Impax Asian Environmental Trust last October.

 

Like its predecessor, the new trust aims to take advantage of growth in the energy, water and waste sectors, but its remit is confined to the Asia Pacific region.

While the Environmental Markets fund, therefore, has a universe of over 800 stocks from which to build the portfolio, the Asian trust must pick from a narrower selection of only 410 listed companies.

The benchmark for inclusion in the trust is that a company must have at least 22% of its activities in environmental markets and Simm says the number of companies that qualify is quickly increasing.

“We launched the trust as we realised that the number of Asian-based businesses in this area was growing very rapidly in response to new policy and enforcement of policy to clean up pollution,” Simm says.

”When we started investing in this area there were about 200 stocks in this universe, and now there are 850”

“The second reason was that we had a number of investors who had supported us for some time who were keen to get exposure to just the Asia Pacific region. We’ve got twice as many Asian holdings in the Asian fund as we do in the global fund.”

The trust is already £138.3m in size and its largest sector allocation is to energy efficiency, with a total of 34% of the portfolio invested there. Since launch the Impax Asian Environmental Markets fund has returned 8.73% to investors.

Given the precarious state of western economies as they limp slowly out of the ­financial crisis preaching a new era of austerity and government spending cuts, many investors are shifting their view on Asia.

Traditionally seen as a risky emerging market bet, China and other growing Asian economies have become the central focus for hopes of a global recovery.

“We’re reasonably cautious about European investments at the moment but are pretty bullish about Asia and North America,” Simm says. “So, taking a global perspective, there are plenty of reasons to be bullish. You’ve just got to be careful in allocating your assets to the right parts of the world.”

While government cutbacks in investment in the sector may be a short-term worry, political commitment to developing green technology and the demands placed on the system by growing urban populations suggests the longer-term picture for environmental investing remains bright.

Even at this worrying juncture for the global economy, there are reasons to stay optimistic.

“In the short term US power prices are still quite weak, due in part to the effect of shale gas on the price of gas. That means that developers of renewable energies are facing lower revenues in the short term than they would otherwise have hoped,” says Simm.

“But meanwhile, the Chinese are motoring ahead and are likely to increase investment in wind and solar.”