Jupiter takes green funds mainstream

Charlie Thomas, manager of the Jupiter Ecology fund, has improved the performance on the portfolio since taking over as manager in 2003, helped by growing public interest in green issues.

The Stern report warns of the devastating consequences of global warming. The Chancellor brings forward a series of environmental taxes. Then, almost to order, a tornado rips through part of London. It is a perfect storm for the climate change lobby.

It also puts green funds in a perfect position. As the planet has warmed up, environmental funds have come in from the cold. Inflows into Jupiter’s two environmental funds are up 60% on a year – and Jupiter Ecology has recently gone through the £200m mark.

It rather helps that the performance figures have perked up markedly. Over the past year, the fund is up 26%, compared with a sector average gain of 8.7%. Over three years it is ahead 80.3%, although over five years its performance is less impressive, rising just 31.7%.

The better performance figures are down to the appointment of Charlie Thomas as manager back in August 2003. He put in place a few more risk controls, such as diversifying and deconcentrating the portfolio. The top 10 stocks went from being 50% of the fund to less than 30%. He also imposed a rigorous 5% maximum holding.

Green funds are typically batched up with ethical funds and regarded with suspicion by financial advisers. After all, they impose negative filters that limit their investment universe and depress returns.

But Thomas turns that on its head. What green investing does is open doors to a huge number of opportunities – and it is not just about fuel cells and wind turbines. Thomas saw 450 companies last year and, as environmental concerns continue to grow, his investment universe is expanding rapidly.

It is interesting what constitutes an Ecology stock. Thomas’s biggest holding is Cranswick, a pig processor. Yes, that’s right, nothing to do with turbines, alternative technology or electric cars. Pigs come into the Ecology portfolio because Cranswick has become one of the UK’s biggest suppliers of organic pork to Britain’s supermarkets. When you buy a “SO Organic” meat product at Sainsbury’s, it probably comes from Cranswick. It also supplies pork for Duchy Originals.

“The average food processing company in the UK is in an environment of 1-2% growth a year. But Cranswick is expanding at 12% a year as demand for organic food is rocketing,” Thomas says.

It seems that, historically, organic food has appealed to a market of about 6% of the population, but is now breaking through to a wider mass market.

Cranswick is just coming into the FTSE All-Share as well, furthering its appeal to investors, but landing Thomas with a bit of a dilemma. Its share price growth has tipped the stock into a 5.5% position in his portfolio, busting his self-imposed risk parameters. But he says for now he is happy to hold on.

The fund’s second largest holding is Latchways, a Devizes-based company that makes safety equipment for engineers who have to go up the likes of electricity pylons. It fits into Ecology’s criteria because, “it is all about sustainable living,” Thomas says. It has been a long-term hold in the fund – there for almost eight years – and is enjoying renewed share price growth on the back of expansion in Germany and South Africa.

Given the fact that I had never heard of either Cranswick or Latchways, it is a safe bet to assume that this is a fund full of small and madcap stocks, which it is. But Thomas is keen to stress that unlike many other green and environmental funds, it is not a pseudo-technology fund. Yes, there are a smattering of hi-tech stocks, but it is not a portfolio of blue-sky, early-stage companies.”Fewer than 5% of the stocks in the portfolio are not in profit. This is not a blue-sky fund. There is no reason why green investing and earnings growth cannot go hand in hand,” Thomas says.

Much of the growth in the portfolio over the past 12 months has come from frenzied takeover activity. Out of a portfolio of 90 stocks, 16 have been the subject of bids over the past year.

What is happening is that a lot of the big industrial concerns, particularly US conglomerates such as GE, have been snapping up environmental businesses. What it confirms is that this is now a long-term secular trend that has moved beyond the fringe and into the core of big corporates. GE is buying these businesses because it firmly believes in the growth story, and that should give a lot of comfort to investors who are cautious about the green investing story.

More recent purchases by Thomas include Zoltek in America and Takata in Japan. Zoltek makes low-weight carbon fibre, and is enjoying strong demand from wind-turbine manufacturers such as Vestas and also from Boeing, which is using the materials in its new Dreamliner airplanes.

Takata is a maker of safety systems for cars. In the recent past that has meant side-impact bars and airbags. But in the future it is going to be about technology that will prevent the circumstances in which accidents happen. Both companies are outside Britain. In total, just under half of Jupiter Ecology is UK-invested, with 20% in both America and Europe.

Thomas has a roam-anywhere mandate and it is interesting that while tech funds have problems finding worthwhile stocks in Britain, when it comes to green investing, there is no shortage here. But Thomas is, for the time being, taking a relatively cautious stance. All those bids have resulted in cash levels in the fund rising to record levels. Currently he is holding cash at around 10% – and is in no mood to go out and spend it. He shares a Jupiter house view that caution will be rewarded for the foreseeable future, given the longer-term uncertain economic outlook in America.

One of the problems I have had in the past is that the managers put in charge of green and ethical funds have not exactly been the best and brightest. Many have let their enthusiasm for the subject cloud their stockpicking, resulting in lamentable performance.

It is interesting that at Jupiter green investing has become completely mainstream. Thomas now sits on the same UK desk as both Ian McVeigh and Tony Nutt. And that is probably about the best recommendation one can give for this fund.