Impax Environmental Markets investing firmly into the ecological zeitgeist- Impax Environmental Markets (IEM) has reported a strong year of performance, although the NAV of the company underperformed its environmental comparator index, the FTSE ET100, follows the Company’s 15.4% outperformance in 2016
In its annual financial report for the year ended 31 December 2017, the company reported that accelerated earnings growth and continuing merger and acquisition (‘M&A’) activity contributed to a 3.2% outperformance against its global comparator index, the MSCI All Country World Index (ACWI). 2017 was the third consecutive year that the company outperformed the MSCI ACWI. F our portfolio companies were taken over during the year at significant premia to their valuations. Asset allocation and foreign exchange movements provided further benefits, notably the portfolio not holding any energy companies and telecoms, and the fund being overweight on technology, but there were winners in all main sectors. Regarding foreign exchange, the portfolio’s underweight exposure to the US Dollar and overweight position on the Euro contributed 1.6% to the company’s NAV.
The underperformance to the more relevant FTSE ET100 index was mostly due to the decision not to hold Tesla (the largest constituent of the index, representing some 10%), which the manager still believes to be overvalued. Aside from not owning Tesla, the manager’s decision not to hold a small number of technology companies contributed to this underperformance. The manager believes these technology companies to be relatively unproven and prefer to investing in established, proven, and profitable businesses with reasonable valuations.
Outlook: investing firmly into the ecological zeitgeist
Earnings growth accelerated in the portfolio in 2017. The manager is confident of healthy earnings growth in 2018 and continue to identify compelling new investment themes within Environmental Markets. The portfolio is well diversified by environmental sector and region, with a healthy balance of economically cyclical and defensive holdings. The manager considers this positioning appropriate for current market conditions.
The chairman notes that throughout 2017, but especially in the final quarter, environmental issues continued to dominate the news, and the reaction time between public concern and government response narrowed. He gave the example of plastics, where, against a background of ongoing discussions regarding various controls and bans of plastic that had started some time ago, governments acted particularly rapidly in response to the public reaction to the BBC Blue Planet television documentary series dealing with the problem of plastics in our oceans. This shift in public interest also stimulated discussion about food packaging and the waste this produces. A number of the company’s holdings tackle this challenge and are developing future solutions, such as bioplastics.
‘We are positive that 2018 will bring further growth for Environmental Markets, which continue to benefit from economic and political tailwinds, among other powerful drivers. ‘
The manager also noted the 2017 US hurricane season, which was one of the most active hurricane seasons on record. Damages cost an estimated $300-$475 billion. Warming oceans are increasing the intensity of extreme weather events, furthering the need for adaptation and mitigation solutions such as water management and backup power. The company’s portfolio hold a number of companies in this area, including Xylem (Water Infrastructure, UK). During the year Generac (Power Network Efficiency, US) were added to the portfolio. As well as hurricanes and typhoons in Asia, the world also saw a series of extreme weather events, including major winter storms affecting the UK, mainland Europe and the US East Coast, and wildfires and mudslides in California. The company’s portfolio has significant investments in companies that provide adaptation and mitigation solutions for extreme weather, for which there is an increasing need.
Prospects in this space include Welbilt ( US), which we added. This company supplies efficient industrial and commercial side kitchen equipment, and is also active in Industrial Energy Efficiency, digitalisation in environmental Market sand sustainable food and agriculture is another theme that the manager is watching closely.
IEM : Impax Environmental Markets investing firmly into the ecological “zeitgeist”