A contrarian call on a fallen Aim star

Now, however, conditions are presenting investors with a value case for the sort of asset managers that can easily control their costs, retain effective relationships with the intermediaries that sell their funds and are sufficiently differentiated to keep hold of client assets or – seen from another perspective – a possible source of inorganic growth for a larger struggling manager.

In this context, a smaller-scale specialist such as Impax Asset Management (IPX) has an attraction that beats its bigger peers. Front and centre is the company’s focus on de-carbonisation and green technology, principally via its Environmental Markets and New Energy funds.

While the reputation of environmental, social and governance (ESG) as an investment concept has been knocked by marketing scandals, and the proliferation of asset managers suddenly professing expertise in such themes the reality is that the energy transition is a genuine growth story. The US alone is investing $70bn in battery factory capacity as part of its curiously named Inflation Reduction Act, leading to the construction of factory space at a rate not seen in 50 years.

Impax’s major listed investmentsdefer to the weight of the US market and include companies that have recently been on a tear. Microsoft (US:MSFT), whichhas doubled in value since the start of the year, is one of Impax’s larger listed holdings. Given the group is also the second-largest US company by market capitalisation, this might not seem like a point of differentiation. Then again, Impax is in the game of picking winners, which doesn’t preclude concentrated bets on massive names.    

Outside of listed equity funds, investments in the assets that Impax tends to favour in its private markets strategies are already cash-generative, meaning the manager can afford to wait out market turbulence to wait for a return on its initial outlay.

However, in the short term, the macroeconomic environment and higher-for-longer interest rates are a major negative for Impax – both in terms of investor sentiment and for the valuations of the tech-oriented companies that it tends to invest in. The outlook shows no signs of changing, although a more positive pipeline of IPOs in the fourth quarter might help to boost animal spirits.

The company also noted in a recent update that institutional investors were delaying investment decisions, rather than cancelling them altogether, which offers some hope that the cash is still on the table.   

That suggests that Impax will have to bear net outflows for a while yet. These spiked in the September-end quarter to £0.9bn and combined with a weak three months for fund performance to push assets under management (AuM) 6 per cent lower to £37.4bn. Unfortunately, market volatility tends to lag withdrawals, meaning tougher markets act as a negative multiplier for client funds.

While the impact on fees is negative however you slice it, AuM has proved stickier than the past two years’ market pain might lead you to believe. There is also a definite split between private investors, who are more likely to pull funds, and institutional investors, who are more prepared to delay and wait for opportunities than to exit to cash. Furthermore, research by interactive investor (II) suggests the share of sustainable investments in individual portfolios continues to grow, from 1.99 per cent at the peak of the ESG boom in 2021 to an average 2.44 per cent weighting in the year to 31 August this year.

So, the wind under the sails of sustainable investing hasn’t disappeared, despite a mixed record of recent returns. What has changed, however, is that larger funds are more careful about the way they label their strategies, which means that smaller dedicated funds that held true to the faith, such as those run by Impax, can position themselves as genuine specialists in a sector that must increasingly cater to sustainably-minded investors. The company does at least have a clear view of what its investment strategy should be, and energy transition has the virtue of being both relatively easy to understand and proactive – meaning it does not rely on a complicated traffic-light system of investment ethics.

Self-help

The company is not a passive actor in its efforts to turn things around. In May, Impax appointed a new global head of marketing, which, along with a restructuring to move back to direct distribution, is aimed to improve the direction of flows. Most of the best asset managers in the UK sector can take advantage of the long-term relationship between investors and advisers, and Impax clearly wants to move in this direction. The pay-off is higher quality and more predictable repeat business and administration fees, removing some of the volatility that comes with charges that are dependent on performance.

When market flows will turn positive is difficult to forecast, although it is clear from the sector's recent updates that most asset managers do not expect a rapid rebound in investor demand. Berenberg, for its part, expects £0.8bn of net fund flows for Impax in the year to September 2024. While hardly earth-shattering, most fund managers will take pedestrian near-term performance in the context of the current market.  

Impax shares are not a risk-free investment, by any means. But after falling 75 per cent since their peak nearly two years ago, the stock appears to be priced for enduring decline rather than the potential upside in its market position. Of course, the difficulty of predicting when things might start to improve is compounded by the effect of market movements on earnings. And while the past two quarters’ net outflows are a concern, it is worth noting that there has only been one other quarter of net client withdrawals since equity markets peaked in late 2021. Compared with many peers, Impax’s asset pile has been a lot stickier.

While the company waits for a steady improvement in sentiment and asset prices, it can also contribute to its own self-help by strictly controlling its costs. Berenberg forecasts that the company’s controllable operational expenses, which excludes variable staff compensation, will be essentially flat at around £33mn for the next two years. This buys the manager time for an eventual improvement in equity markets, at which point the group should be better placed than most legacy asset managers to benefit from operational gearing.

This buffer is also encouraging for the stability of the dividend, which analysts expect to be covered 1.3 times by earnings this financial year. Despite that strong ratio – and a decent cash pile on hand – the stock’s dividend yield now stands at a high of 7 per cent. Under the circumstances, investors can take that payment as a “pay-to-stay” incentive until Impax’s underlying investments find their feet, and its prospective fund investors regain their confidence.