Obama plan fuels Impax prospects
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Alternative energy hit the front pages last week as President Barack Obama revealed details of his proposed $825 billion (£580 billion) American economic stimulus package. In his drive to achieve American energy independence, Obama announced measures to encourage fuel efficiency and build “a new energy economy”.
“Embedded in American soil and the wind and the sun, we have the resources to change,” he said. “Our scientists, businesses and workers have the capacity to move us forward.”
Beyond Obama’s aspirational phraseology, the American Recovery and Reinvestment Plan sets out ambitious targets. The scheme aims to double America’s alternative energy generation capacity over the next three years, creating 460,000 jobs and requiring an extra 3,000 miles of transmission lines. Such figures are likely to re-ignite interest in renewable energy as equity investors seek out industries able to withstand the tougher macroeconomic conditions.
The Association of Investment Companies’ Environmental sector offers British investors four funds focused on environmental and alternative energy securities. Only two – BlackRock New Energy and Impax Environmental Markets – have three-year track records.
The Impax fund was launched in February 2002, and C-share issues in 2005, 2006 and 2007 have since boosted assets under management to over £300m. Day-to-day management of the portfolio is carried out by Bruce Jenkyn-Jones, managing director of listed equities at Impax, and Jon Forster, associate director.
Jenkyn-Jones says the biggest shift in the fund at the end of last year was an increase in its exposure to solar power. The trust bought stakes in SunPower and 5N Plus – a Canadian firm supplying raw materials to the solar thin-film market – in the final quarter of 2008.
“At the end of 2007, SunPower was trading on 50-60 times earnings and there was a bubble in the solar sector,” says Jenkyn-Jones. “SunPower is now trading on seven to eight times earnings. We avoided the bubble, but when valuations are appropriate we will take a position.” SunPower, an American designer and manufacturer of solar electric technology, aims to compete with retail electricity rates by halving the costs of its systems over the next three years.
The Impax fund employs a pure bottom-up stockpicking style, with no regard to geographical location. North America and Europe accounted for more than 80% of the portfolio at the end of December, but Jenkyn-Jones says Asian companies will take a bigger proportion of the fund in future. Impax has formed a partnership with a firm in Hong Kong, giving it better coverage of the region, and Jenkyn-Jones increased his stake in Epistar – a Taiwanese manufacturer of high-brightness light-emitting diodes (LEDs).
“Epistar suffered in the markets and there was an interesting opportunity to pick up shares,” he says. “LEDs will increasingly be used for laptops, residential applications and motor vehicles.” Chinese investments include China High Speed Transmission Equipment and Everbright, a waste water treatment firm.
However, in the near term at least, Obama’s proposed stimulus package means that America will remain a key market. Jenkyn-Jones says the shift to renewable energy will benefit a range of technologies. “America has tremendous resources in wind and solar power, and it is blessed with geothermal resources. Geothermal is a totally predictable energy source so you can use it for base-load generation – it is the most attractive alternative to coal and oil.”
Ormat, a firm involved in geothermal power production, was the fourth-largest holding in the Impax fund in December. Jenkyn-Jones is more cautious on biofuels, but the trust has indirect exposure through Novozymes, a firm supplying enzymes for ethanol production.
Jenkyn-Jones’s upbeat assessment of the prospects for American wind power contrasts with his views on the British market. It emerged last week that Eon UK is considering the viability of the “London Array” project – a planned 1,000 megawatt offshore windfarm in the Thames estuary. The scheme has been called into question by falling prices of oil, gas and carbon dioxide emissions permits.
“There are still challenges for offshore wind,” says Jenkyn-Jones. “It is capital intensive and companies have to maintain equipment offshore. Onshore does not have the same challenges but the UK does have planning issues, unlike the US. The UK government needs to weigh up its priorities.”
Impax Environmental Markets, which typically contains about 90 stocks, has performed well against its MSCI benchmark. According to Financial Express the fund returned almost 50% over the five years ending January 27, compared with 9% for MSCI’s global small cap index.
For Charles Cade, the head of research at Numis Securities, the fund is a preferred pick in the Environmental sector, alongside BlackRock New Energy. “The fund has traded on a premium in the past, so it is not an outstanding value play,” says Cade. “But for investors who want long-term exposure to the sector, Impax has built up a strong team.”
