Green themes provide opportunities to invest

Charles Thomas, manager of Jupiter’s Green Trust, answers this week’s questions from Simon Hildrey.

Q: Why is the Global Green investment trust being wound up?

A: The Global Green investment trust is reaching the end of its life and therefore we decided it was appropriate to roll it over into the new Jupiter Green Trust. All shareholders in Global Green will be offered shares in the new Jupiter Green Trust.

Q:What is the investment approach of the Jupiter Green Trust?

A: The new trust will focus exclusively on six themes. These are clean energy, water management, waste management, sustainable living, environmental sciences and green transport.

We invest in companies that can benefit from these environmental themes as we believe they offer strong growth over the next one to 15 years.

When it comes to selecting stocks, we look for companies where we have identified a catalyst that will increase profits over the next two to three years. Catalysts can be companies being in a growth market, having the right product or that will benefit from a change in public policy or legislation.

The turnover of stocks is relatively low and we tend to hold stocks for between one and five years.

The fund has a bottom-up stockpicking approach. We do not asset allocate between countries or the six themes.

If we cannot find stocks that offer value or have a catalyst in a particular theme then we will not hold any companies in that theme.

But we do take legislation and public policy into consideration when deciding whether to invest in stocks. It is important to understand markets and industry trends.

One of the advantages of having the six themes is that it allows us to alter our exposure between them depending on which offers the best investment opportunities. This provides greater flexibility for us.

It is a relatively concentrated portfolio of 60 stocks, which are only our best ideas. The portfolio is largely invested in small and mid-cap stocks because of where the investment opportunities lie. The Jupiter Green trust also has the ability to gear up to 20% of the net asset value.

Q: Do you invest only in stocks that meet certain ethical or environmental criteria?

A: Jupiter Green Trust takes a different approach from traditional ethical and SRI [Socially Responsible Investment] funds. We do not select stocks because they meet ethical or environmental criteria. Stocks are not rejected for negative reasons, such as environmental concerns. We follow the same engagement activity as Jupiter does on all our funds but we invest in companies because they are in a position to profit from the six environmental themes we identified earlier.

This may be because they offer an alternative energy source to oil and gas, provide ways to increase energy efficiency such as insulation, offer methods to improve waste management or supply organic food. They meet ethical criteria in the sense that they promote solutions to issues of environmental concern.

There are plenty of examples of how companies can profit from these themes. For example, demand for organic food in America has been growing at 10% a year for the past 10 years. In India, around 23% of sewage is treated, whereas the rest is disposed of inappropriately. Around one billion people in the world do not have access to water on a daily basis.

Q: Can environmental investing deliver strong share price returns?

A: We focus on companies that are already profitable rather than blue-sky businesses. Around 95% of the stocks we have identified are profitable at the moment. Prospects look good going forward for companies that benefit from these themes because there is growing awareness of, and interest in, environmental issues. Therefore, companies with products or services in these areas will enjoy growth in profits and share prices. The Jupiter Green Trust is an investment-led fund.

Q: As this is a specialised area, is there a danger that other investors will not realise the attraction of these stocks?

A: That is a possibility. But experience in America has shown that if companies increase their profits then they will attract investors. Indeed, in America there is little research coverage of between 3,500 and 4,000 companies, so there is mis-pricing potential that can be exploited.

Q: What is the role of the America-based Winslow Management?

A: We have appointed Boston-based Winslow Management to run the American portion of the fund. It has been managing green funds since 1990 and has nine members in its team, which complements the nine we have in London. We believe their involvement is an attraction of the trust over other funds in the sector.

Winslow recommends stocks from the American market and then we decide if we want to include them in the fund. We do not asset allocate between America and other markets. Those stocks deemed to be the best investment opportunities are included in the portfolio, wherever they come from.

Q: What benchmarks do you use?

A: We use two benchmarks to reflect the underlying holdings. They are the American Russell 2500 Growth and the FTSE World Smaller Companies indices. Initially, 30% of the portfolio will be allocated to the American market. But as the proportion of stocks from America rises or falls, the amount allocated to the American Russell 2500 Growth index rises and falls.

Of the rest of the portfolio, 30% is initially allocated to Britain and 40% to the rest of the world. Most of the investment opportunities are in developed markets, including some in Japan. There is a smattering of stocks in emerging markets.

We charge a performance fee. This is 15% of the outperformance but is capped so the fee does not run away. The total fee can reach a maximum of 1.75%. There is also a high water mark so that investors do not pay the performance fee twice.

Q: Will the fund appeal to ethical and other investors?

A: The feedback from IFAs is that ethical investors like the fund because it invests in companies that benefit from themes that are important to them. IFAs have said that the fund is expanding the potential investment base to clients beyond ethical investors.

Q: Why could oil and gas prices affect stocks in the portfolio?

A: Falling oil or gas prices can affect the performance of companies that offer alternative sources of energy or have ways of making energy use more efficient. While the oil price is at $70 there will be greater demand for alternative energy. Yet if the price falls to $25 there will be less interest. This is why having the flexibility of moving between the six themes is important.

Charles Thomas – is the manager of the new Jupiter Green Trust. He has managed the Global Green investment trust, as well as Jupiter Ecology and Jupiter Global Active. Before joining Jupiter in 2000, he was environmental policy adviser and commercial analyst at BP. He holds an MSc in environmental technology from Imperial College, University of London, and a BSc in environmental biology and European studies from the University of Nottingham.