Reaping the rewards of renewable energy

Over the first five months of this year, the trust underperformed the MSCI All Country World Index due to its bias to small and mid-cap companies. Mr Forster says that being overweight industrials and underweight healthcare has also hindered its relative performance. And having gearing – debt – amplified its losses. The trust had gearing of about 3 per cent as of 12 June, according to broker Winterflood.

However, in recent weeks the trust has recovered most of its losses. Mr Forster says that smaller companies have experienced share price falls over the past few months because they are less well covered and understood, but Impax Environmental Markets' holdings are “well established, proven profitable businesses”.

The weighted average market cap of the companies the trust holds was $6bn (£4.78bn) at the end of April, while the average size of the companies included in MSCI All Country World Index was $216bn.

Impax Environmental Markets is broadly diversified across environmental markets and the performance of its holdings has been mixed. Construction and manufacturing companies, for example those involved with the electrification of vehicles, have struggled. But utilities companies that supply basic needs have generally performed well, as have renewable energy companies – despite the collapse in the oil price.

“It’s a misconception that the oil price is critical to the future of environmental markets,” says Mr Forster. “The oil price does not drive power prices and is not really relevant to the future of renewable energy, which is much more driven by government policy and the falling cost of technology.”  

Project developers, which take planning and construction risk, and build renewable assets are the main way the trust gets exposure to renewable energy companies. But although Mr Forster thinks most types of renewable energy companies offer value at the moment, he and his team are currently finding the best opportunities among utilities and wind power – areas in which companies can build sustainable competitive advantages. 

Mr Forster and his colleagues have not recently changed the trust’s overall asset allocation but did add three new holdings when markets fell. These include Repligen (US:RGEN), a US filtration business that supplies healthcare and drug manufacturing companies. Mr Forster added it because of its defensive qualities and to get exposure to healthcare, which he says is “quite hard to come by in environmental markets”.   

The trust also bought Giant Manufacturing (TAI:9921), a Taiwanese company with a strong position in e-bikes. “We used weakness in markets to pick up the holding, and bike sales have been going through the roof,” explains Mr Forster, adding that e-bike demand is particularly high among aging populations.  

Rational (GER:RAAX), meanwhile, is a German company that makes high-efficiency ovens and combi boilers for large and commercial kitchens. Mr Forster says that this is an area that has been severely impacted by lockdowns and has a challenging near-term outlook. However, he has been wanting to invest in this company. “We took the opportunity to get in for the long term when the company was at a reduced valuation,” he explains.  

Mr Forster and his colleagues sold efficient boiler business A.O. Smith (US:AOS), meanwhile, as competitive threats are emerging in the US. And they sold Hollysys Automation Technologies (US:HOLI), a Chinese company that provides automation equipment to rail networks but which is listed in the US. He said that this was a “well timed exit” given Sino-US tensions.  

At the end of May, 41 per cent of the trust's assets were invested in North America, with 39 per cent in Europe and 15 per cent in Asia-Pacific ex Japan. Mr Forster says that they select what they think are the best businesses irrespective of where they are listed. But he would like to increase the trust's exposure to Asia Pacific because he thinks valuations of companies listed there are attractive and there are lots of growth opportunities. 

He also thinks that software companies offer some opportunities. “The industrial world will become much more digital and we see great scope for efficiency in this area,” he explains.

The trust has about 7 per cent of its assets in software companies and these include its largest holding, PTC (US:PTC), which Mr Forster says has some “key building blocks for the internet of things”.

The trust also holds Advantech (TAI:2395), a Taiwanese computer manufacturer that focuses on industrial automation. Mr Forster says that it’s “good to have big weightings in sectors [such as software and automation] squarely positioned for growth going forward”.