QD View – Go Green? Impax Environmental Markets is doing very well but is it too popular?
It has been a short week and a quiet week in the investment companies market. Funds continue to report results for 2020, however, and the one that stood out for me this week was Impax Environmental Markets.
Shareholders made almost 30% over 2020, a great result in a difficult year, but unfortunately materially behind the return on its benchmark. The reason for that largely comes down to it not owning Tesla.
The manager felt that Tesla and its Chinese competitor Nio were too expensive, it also says it has some ESG concerns (which I think is referring to governance issues). Impax Environmental also missed out on soaring prices of companies exposed to hydrogen (as power for vehicles, energy storage or an alternative fuel for heavy industry). The manager feels that the opportunity has been overstated.
Fortunately, the underperformance has not dented the trust’s popularity. Impax Environmental has been trading at a premium almost continuously since October 2018. It surpassed £1bn of net assets during 2020 and continues to expand with regular share issuance (but see below).
To my mind, one reason why Impax Environmental dominates its sector is because it has a tight focus on its objective: Enabling investors to benefit from growth in the markets for cleaner or more efficient delivery of basic services of energy, water and waste.
Just three listed environmental funds
The competition is Menhaden and Jupiter Green, both a fraction of the size of Impax Environmental. The Impax fund leads the performance table. Jupiter Green has a better track record than Menhaden, and this has been improving recently after a revamp of its investment approach. However, it lost its lead fund manager earlier this year.
Menhaden also announced results this week. These were much inferior to Impax Environmental’s (lagging in NAV terms by about 17% and in share price terms by about 27%). The real problem though is its largest investments are stocks like Charter Communications (a US broadband company), Alphabet and Microsoft, for which Menhaden is obliged to dream up unconvincing (to me) reasons as to why they qualify for inclusion in its portfolio.
Seismic shifts in climate policy
In Impax Environmental’s report to shareholders, the chairman enthuses about the seismic shifts in climate policy that occurred over 2020. This trend was underscored by Biden’s triumph in the US elections. Securing approval for an ambitious infrastructure investment plan is a central plank in the new administration’s agenda. The scope of this encompasses areas such as renewable energy generation, infrastructure to support electric vehicles, green housing and water and waste management. The promise of spending on such a scale has helped raise the popularity of environmental investing.
Increased competition
The Impax report also laments the increased competition for investable assets in the sector. Part of the problem with that is that the manager fears it will struggle to deploy the proceeds of share issues if these become too large. It has asked the board to limit share issuance to a maximum of 10% a year. The chairman cautions that, if the board runs out of room to issue stock, excess demand for Impax Environmental’s shares could leave it trading on an ever-larger premium.
The report also said that there has been so much cash flowing into the company that this has crowded out gearing (borrowing).
Too much money?
I find that last point concerning. The main argument for closed-end funds is that the manager is free to make long term investment decisions without worrying about inflows and outflows of funds. That doesn’t mean that funds cannot expand and contract in response to demand but they should do this without compromising on investment returns. Investment companies with zero discount policies can operate these because their underlying portfolio is highly liquid – money flowing in and out makes no difference to returns. Every other sort of investment company should manage share issuance and repurchases in such a way that ongoing investors aren’t compromised.