Impax Environmental Markets has announced results covering the 12 months ended 31 December 2024. Over the period, the NAV total return was -0.4% and the share price total return was -2.6%. These compare to a 19.6% return on the MSCI All Countries World Index and a 16.8% return on the FTSE ET100 Index. The dividend was upped by 8.7% to 5p.
During the year, the company bought back 41.25m shares, or 14.7% of its issued share capital at the start of the year, in order to support shareholders and mitigate price volatility. IEM’s discount was 10.7% as at 31 March 2025.
The chairman observes that over 2024 the wider global equity market was heavily influenced by a narrow group of mega cap stocks (the Magnificent Seven) which do not fit the trust’s remit. This is increasing the concentration of large indices – the top ten stocks by market cap of the S&P 500 account for 32.4% of the index’s total market cap. None of these companies offer pure play exposure to environmental markets.
He highlights that the earnings of portfolio companies have been growing faster than the earnings of companies in the index, suggesting to us that the problem is one of sentiment towards environmental companies. It also means that the companies in the trust have been getting cheaper. The manager’s contention is that the very low valuation levels of companies in environmental markets represent a huge opportunity, especially given the turn in the global markets since the start of the year.
The board feels that the company needs a new benchmark that better reflects its opportunity set, saying: “One of the issues shareholders have faced in understanding the performance of IEM is that a large percentage of the MSCI ACWI benchmark is made up of stocks that cannot be held in the IEM portfolio. And, as referenced in the company’s latest half-yearly financial report, the FTSE Environmental Technology 100 Index, which we have historically used, no longer represents the best reflection of the opportunity set. To improve the standard of our reporting and to understand more objectively the nature of returns and the performance of the manager, the board is working with the manager to introduce a new benchmark to reflect the opportunity set. I will have more to share on this in the coming period and expect to be updating shareholders on an alternative, after thoroughly testing it as a comparator measure of success.”
Ahead of this year’s continuation vote, the board has consulted a large proportion of the shareholder base representing over half of the issued share capital to listen and discuss the company’s thematic mandate as well as understand their perceptions of the company, its performance, fees, capital structure, the manager and the role that the company plays in their portfolio. It says that the results of this extensive engagement were supportive of the company and its strategy.
The chairman notes that [following the recent demise of Jupiter Green and Menhaden Resource Efficiency] the trust is unique in giving access to both shareholders and potential investors to this unique and exciting growth story. It has generated strong returns since inception, as well as over an assortment of longer term time periods.
Bruce Jenkyn-Jones plans to retire as a co-investment manager on 1 July 2026. Jon Forster and Fotis Chatzimichalakis will continue as co-investment managers following Bruce’s retirement next year.
[While the headline numbers may be disappointing, it is hardly surprising that sentiment towards environmental stocks has been hit by the new US regime. The key message in here is that the underlying earnings on the portfolio are growing. In time, the valuation anomaly should drive a re-rating. Patience is required.]
Extracts from the managers’ report
Positive contributions to performance were broadly spread across IEM’s portfolio. In addition to several acquisitions (see Key Developments and Drivers) many companies delivered consistently strong returns over the year, such as Clean Harbors – a US industrial waste specialist, CATL – a Chinese battery producer, and Brambles – an Australian pallet and logistics company. Despite all being categorised as ‘Industrials’, the companies have highly differentiated business models, sources of revenue and geographical exposure. Furthermore, where CATL was added to the portfolio early this year due to a compelling valuation opportunity given its competitive advantage, Clean Harbors is a long-term holding which continues to demonstrate how quality management can drive up earnings by capitalising on captive demand, structural growth and ever-tighter regulation.
One specific area of strength within the portfolio was companies with exposure to construction, particularly in the US. These delivered positive returns in 2023 and continued to do so in 2024. At a headline level, high interest rates have done little to weaken residential demand, while infrastructure investment and commercial spending continues apace.
Exemplifying these trends are two of IEM’s top contributors for the year: Pentair and Lennox International, a producer of water flow technology and HVAC1 solutions, respectively. Pentair steadily drove margins up over the year, with growing sales from its Pool division and further synergies from its Manitowoc Ice acquisition. Lennox delivered a series of “beat and raise” earnings updates, citing market share gain and sales growth within its commercial business. While the long-term investment cases for these, and IEM’s other construction holdings, remain intact, we have managed the position by taking profits, bearing in mind the industry’s cyclical nature.
IEM’s Digital Infrastructure stocks also boosted performance. With a shared focus on operational efficiency, and consequently environmental performance, its customers have continued to invest in solutions which boost their bottom line. Within this segment, software companies include the likes of transportation management platform Descartes and design and simulation specialist PTC, whose dominance of a niche and subscription-based revenues enable steady growth. By comparison, Trimble – a producer of geolocation software and equipment – rallied substantially after repeated engagement and an activist shareholder produced a strategic update and earnings upgrades.
In hardware, the strongest contribution has come from Monolithic Power Systems a producer of thermally efficient power semiconductors. The shares performed strongly thanks to sustained growth in data centres, where Monolithic is sole supplier to Nvidia (not held). Concerns this relationship could be at risk prompted a pullback in the shares towards the end of the year but appear overdone. Management has long trailed Nvidia’s desire for another supplier and has factored this into guidance. Equally, growth is returning to Monolithic’s other business segments which have experienced temporary weakness, such as autos, consumer electronics and industrials.
Lastly, the portfolio also benefited from its positions in companies related to the energy grid. These include long-term holding Generac, as well as Prysmian. The former, a maker of standby electrical generators, experienced resurgent demand in its home standby division thanks to a particularly active hurricane season and its continued penetration of US distributors. By contrast, Prysmian – an Italian producer of electrical and fibre optic cables – is at the centre of long-term investment in grid infrastructure. At the time of its purchase in October 2023, the investment managers also saw evidence of a business turnaround at an attractive valuation. This thesis has played out rapidly in 2024, with the acquisition of US company Encore Wire helping management to boost margins, deliver cash flow, and deleverage the balance sheet.
The bulk of IEM’s negative returns came from holdings in a handful of sectors with compelling long-term growth that have been experiencing temporary headwinds. The portfolio’s renewables holdings account for the largest of these. Excepting Terna Energy which was taken over (see Developments and Drivers), averaged out across the full year this 8.6% allocation spans four IPPs, two solar positions and a manufacturer of wind turbines. From a sentiment perspective, sustained higher interest rates and Donald Trump’s re-election weighed on the P/E multiples of all seven companies.
IPPs were further impacted by low European power prices, themselves driven by soft industrial production and plentiful US gas. Yet here the investment managers are seeing consistent evidence of new long-dated contracts being priced at higher rates with inflation protection, particularly where the source of demand is Big Tech. At the same time, holdings such as Northland Power are navigating medium-term uncertainty by focusing on project execution and cash generation, while companies like Ormat Technologies continue to receive vocal support for their geothermal energy and battery storage solutions. This is creating a range of attractive valuation opportunities across the space.
In wind and solar, there were more fundamental issues. In solar, sustained weak demand combined with poor capital discipline from Chinese producers resulted in weak performance and ultimately a loss of conviction for both SolarEdge Technologies and Xinyi Solar. The latter had also rallied meaningfully following Chinese stimulus. Similarly, Vestas, a maker of wind turbines, reported successive results with disappointing margins. These were driven by accounting adjustments from its services division, historically seen as a superior quality business relative to peers. With lingering questions about margin recovery, increased Chinese competition and management quality, the managers exited the position.
Conversely, the trajectory of IEM’s Life Sciences companies provided an almost exact mirror image. Repligen, a maker of products and solutions for the bioprocessing industry, entered the year assuming continued sales weakness would prevent it being able to raise prices. Yet by Q3, more supportive demand, combined with product differentiation and a push into more commercial customers, enabled the company to boost its operating margin by 1%.
Shares in Spirax Group, a supplier of specialised industrial heat solutions, also inflected towards year end. Sustained weakness in Watson Marlow – its peristaltic pump division with significant bioprocessing exposure – had been compounded by softer industrial demand, particularly in China. Here too though, a November trading update indicated a return to growth despite these challenges.
Industrial production remains weak globally, and companies which experienced super-normal demand during COVID have faced lengthy inventory destocking periods. While some of these are now normalising, holdings with weak cyclical end markets accounted for the second largest source of negative returns. These include manufacturers of electrical components such as Littelfuse (a maker of circuit protection), LEM (maker of transducers) and DiscoverIE (a specialist industrial manufacturer). Amid weaker demand for their products, these companies have been active in cutting costs to protect margins. More optimistic forward guidance in Q4, notably from DiscoverIE, provided a late boost to the shares, demonstrating their recovery potential when market dynamics change.
IEM : Impax Environmental Markets pleads case for continuation after difficult year
