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Jupiter Green’s board is “evaluating options for the future of the business”

Jupiter Green (JGC) has published its annual results for the year ended 31 March 2024, during which its NAV has increased by 1.3% and its share price has fallen by 19.2%, both significantly underperforming the MSCI World Small Cap index, which returned 11.5%. The discount at the end of the year was 31.33%, having started the year at 13.37% and ranging between 9.12% and 31.33%. The board says that it remains committed to using share buy-backs so that the share price tracks the NAV but acknowledges that the discount has recently traded out further than it would like. It says that, due to its relatively small size and the challenging macro environment, the board is currently evaluating options for the future of the business “in recognition that it may be in the best interests of shareholders for the Company not to continue in its present form”. It adds that, at this point in time, there can be no certainty as to the outcome of this, but the board will notify the market at the appropriate time.

Market review

JGC’s manager, Jon Wallace, comments that the year was defined by the dominance of the ‘Magnificent 7’ mega-cap technology companies, particularly those supported by Artificial Intelligence (AI) as a structural tailwind. Alongside this dynamic, markets have also faced a period of volatility as investors have responded to concerns about the persistence of inflation, rising interest rates and geopolitical uncertainty, he adds. However, against this backdrop, environmental solutions businesses were resilient overall in his view, but mixed at an individual theme level. Combinations of areas of weakened environmental policy commitments, as well as signals of moderating growth rates in pockets of solution themes, were offset by continued structural growth and positive outlooks elsewhere. For example, following several years of strong growth, a weaker consumer environment combined with a more challenging policy backdrop has tempered expectations in the nearer future for electric vehicle sales growth, while expectations have risen significantly for investments into critical infrastructure such as in areas of water-related technologies and solutions for efficient, clean, and resilient power grids.

Wallace says that he has been encouraged by areas of convergence at recent global summits, highlighting that, at the COP 28 Climate Conference, a pivotal step was to bring food systems into national climate plans for the first time. He says this has also served to help broaden the opportunity set for investors looking to access solutions to reduce greenhouse gases across the economy, including those that improve natural resource efficiencies in food systems.

Drivers of returns

Leading returns was the Company’s Sustainable Oceans & Freshwater Systems theme, alongside the Green Building & Industry (GBI) theme. GBI is one of the company’s largest allocations, alongside Circular Economy, at around 25%, and includes solutions for energy efficiency applications that are critical to a resilient and decarbonised power sector. Wallace says that the prospect of a step-change in power demand in the US given an increase in planned industrial and data-centre investments also served to bolster the outlooks for several companies in this theme. Monolithic Power, Acuity Brands and Schneider Electric were among the top stock contributors within the theme.

The Water theme, which comprises relatively less at approximately 11% of JGC’s overall portfolio allocation, offers both diversification and access to structural opportunities related to much-needed investment in water infrastructure, in Wallace’s view. He says that JGC’s investments focus on leading solution providers operating globally to serve utility and commercial sectors, as opposed to water utilities themselves.

Companies within the theme also offer climate adaptation solutions, improving efficiencies in water usage, addressing flooding control during the period of unusually high rainfall. The largest contributor at the stock level over 12 months was Advanced Drainage Systems, a US-based leader in stormwater management solutions. JGC recently took profits from the company following a rally on strong results. While the Green Mobility theme has faced headwinds on slowing growth in electric vehicle (EV) sales which has weakened sentiment for some of our investments engaged in the EV supply chain, Wallace says that the position in Horiba, a Japanese precision instrument manufacturer, contributed very positively over the year.

The largest detractor to performance during the year was the Clean Energy theme. The theme has an approximate 18% weighting in the portfolio, and saw setbacks where companies such as Solaredge and Orsted faced considerable pressure from relatively high interest rates, supply chain constraints and rising input costs.

Investment manager’s outlook

“We have a long-held conviction that global development is and always has been dependent on the natural world. While we remain highly cognisant of geo-political tensions, potential macro-economic weaknesses and regulatory risks for instance that impact upon our investment landscape like any other, we would highlight that observed changes to the environment, not least climate indicators, are more severe than anticipated and in many cases still not fully explained.

“Our conviction also remains that this presents an ever-more compelling long-term growth opportunity for leading companies focussed on delivering real- world solutions to protecting the climate as well as wider forms of natural capital, including water resources and biodiversity.

“It is notable that growth drivers within our environment solution themes continue to be buoyed by an appreciation of the broader benefits of environmental solutions amongst corporations and governments. Areas where this is apparent include the role environmental technologies are playing in helping to address growing energy security concerns, and the benefits to human health of tackling longstanding and ’emerging’ pollutants in water resources.

“In our view, this will continue to provide resilience in investment returns at a time when there is a risk that policy commitment to environmental agendas, at least at the headline level, may wane or even take a backwards step, with the US election later this year a notable case in point. However, we are encouraged by the clear signals of a widespread recognition that, irrespective of political leaning, environmental technologies and services across our six investment themes will play a pivotal role in the economy of the future.”

[QD comment: It’s a shame to see the future of a trust like Jupiter Green, which invests in things that help society, in question. However, the board is right to be looking at this. The trust is sub scale and, while acknowledging that it has faced significant headwinds to its style in recent years, the relative performance of its NAV has been poor. Once you take into account the hefty discount widening, it’s not been great for shareholders, albeit there is now strong recovery potential. We wonder whether it could be wound into a fund like Impax Environmental Markets (IEM). This would solve JGC’s scale issues immediately and shareholders would suddenly find themselves invested in a much more efficient and liquid trust. IEM has a similar enough remit so shareholders would continue to tick the box of holding companies designed to make a positive impact and, having faced similar headwinds in recent years, there’s strong mean-reversion potential here as well.]

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