Impax Environmental Markets had a great start to 2016. Over the six months ended 30 June 2016, the NAV achieved a total return of 19.4% and ended the period at 211.12p. The share price total return was 16.0%. They say that approximately half of their absolute performance was attributable to investment returns and half to the decline of Sterling. By contrast, the total return on the MSCI All Countries World Index was 11.6%, while the total return on the FTSE ET100 Index was 8.9%.
The manager’s report says the water sector continued to deliver strong performance. Water utilities in drought stricken areas such as Sabesp and California Water were rewarded for delivery in crisis conditions. The unprecedented droughts experienced in California and the Sao Paolo region of Brazil have been well covered in the media. The snow packs in the Sierra Nevada Mountains, which provide 30% of California’s water supplies, hit their lowest level in 500 years in the summer of 2015. Meanwhile, Sao Paolo’s reservoir levels dropped to as low as 10% of capacity in 2014-15. The managers say water utilities serving these areas responded with innovative tariff structures and are making significant infrastructure investments to increase future supply. With both regions now seeing rainfall and water supplies returning to more normal levels these utilities are being rewarded with positive outcomes of regulatory reviews or rate cases, driving share price performance. The managers think increasingly volatile weather patterns will continue to highlight the inadequacy of existing infrastructure for water supply and will present opportunities for the utilities and technology companies delivering the solutions to these problems. Water utilities were generally robust against the backdrop of record low interest rates and their defensive characteristics. Water infrastructure companies also saw solid gains driven by increased municipal spending on repair and renewal of ageing networks, particularly in the US. Together with the recovery of construction activity, this led to outperformance by Xylem and Watts Water (both US).
The Company’s Sustainable Food and Agriculture holdings also delivered sound performance, especially those in aquaculture (Leroy Seafood Group, Norway), organic food distribution (United Natural Foods, US) and in software for “connected farms” (Trimble Navigation, US). They continue to find compelling growth opportunities in this area and also see this as an attractive source of portfolio diversification.
On the downside the solar sector was weak. Solar holdings underperformed over the Period, reflecting a temporary hiatus in demand and concerns about overcapacity. On the demand side, in the United States many projects were accelerated in 2015 in expectation of cancellation of subsidies. The subsidies were unexpectedly extended and as a result the managers say we are now seeing projects being delayed as the sense of urgency to complete solar installations has dissipated. Meanwhile, in China subsidy cuts are expected this July leading to sales being heavily skewed to the first half of 2016. On the supply side, they also continue to see Chinese companies establishing additional manufacturing capacity outside China to circumvent ongoing trade disputes with the US and EU. This proved negative for SunPower and Trina Solar (both US). The managers recognise the short term headwinds but remain focussed on the long term growth opportunity afforded by the falling costs of technology and increasingly diverse regional end markets. Their focus is on companies with a technology edge or dominant market position.
Transport Energy Efficiency holdings with exposure to the automotive markets were weak. This was a reflection of concerns about the stage of the cyclical recovery and the impact of disruptive changes such as electric vehicles, driverless cars and Uber. BorgWarner and Sensata (both US) were weaker as a result. They continue to see good long term growth prospects for our holdings, driven by increasingly stringent emissions control and fuel efficiency regulations for internal combustion engines and increasing market penetration of electric and hybrid vehicles. IEM has significant exposure to both these themes.
At 30 June 2016, the value of the Company’s investments in unquoted companies was GBP10.1 million, representing 2.4% of net assets. During the Period NERR went into administration. However since this was written down to zero at the end of last year, it had no effect on IEM’s valuation. They say Ensyn continues to make good progress.
IEM : Impax starts 2016 well as water holdings outperform