Buy clean while cheap

The credit crunch had cast a shadow over alternative energy, but with growing government legislation on energy efficiency, rocketing commodity prices and a rethink of energy sources following the accident at Japan's Fukushima nuclear plant, it might be wise to buy alternative energy companies while they’re still cheap.

A good way to do this is via the Impax Environmental Markets investment trust which focuses on cleaner and more efficient delivery of energy, water and waste. It mainly invests in listed companies involved with technology-based systems, products or services in environmental markets.

It has a strong performance record with positive returns over one, three and five years, making it the best performing investment trust in its Association of Investment Companies sector, environmental. It also massively outperformed the FTSE ET50 index, an environmental technology index, over those periods.

Over five years to the end of February, the trust also made 33 per cent against 23 per cent for MSCI World.

In the past, this trust has traded at a premium to net asset value and, with signs that the discount is already tightening, it might be an opportune moment to buy. The trust's discount is wider than that of its popular, but younger, sister fund, Impax Asian Environmental

The environmental sector tends to lag rising energy prices, so Tom Tuite Dalton, analyst at broker Oriel Securities, anticipates further upside in the investment trust's share price following a rise in energy prices. If the trust's discount widens, its board is likely to approve share buybacks to control it, as happened last year.

Impax's managers believe there are good opportunities in the US, the trust's greatest country exposure, which together with Canada accounts for 37 per cent of assets. The US recently proposed measures including the use of more natural gas and biofuels.

The trust's Europe exposure, also 37 per cent of assets, should benefit from Germany's commitment of €2bn a year for investments in energy efficiency.

Meanwhile, Japan, in which the trust has 5 per cent of its assets, plans to use a wider range of renewables than at present helped by a feed-in tariff which starts in 2012.

The trust also has 14 per cent of its assets in Asia ex-Japan, with a number of Chinese holdings which should benefit from tax exemptions and a drive to cut carbon intensity by between 40 and 45 per cent by 2020, relative to 2005.

Impax's managers pick stocks largely on the merits of the individual companies, but also take into account economic factors. "The team employs strict valuation controls and sell discipline," comment analysts at stock broker Winterflood. "They see this as particularly important as the renewable energy sector has been susceptible to bubbles over the last 15 years."

The managers take a long-term view and look for companies which have:

■ a compelling business proposition based on proven technology

■ management quality

■ exposure to global environmental policies and regulations; and

■ new growth markets.

The trust is well-diversified across sectors rather than just relying on alternative energy, which should help to lower volatility. Growing population and increased urbanisation should create greater demand for improved efficiency in energy supply and waste management, the trust's two largest sector exposures.

Impax Environmental Markets is the largest investment trust in its sector with a market cap of around £390m, meaning better liquidity for its shares.

Key fund data:

Source: Investors Chronicle, *Impax.

Performance data as at 18 April 2011.

Top 10 holdings as at 31 March 2011:

Sector breakdown: