Impax Environmental Markets beats broad index but misses out on Tesla rise

Jon Forster, co-manager of Impax Environmental Markets, says this underperformance was because it does not hold US electric car maker Tesla (US:TSLA), which accounts for around 10 per cent of FTSE Environmental Technologies 100 Index. He feels uncomfortable with Tesla's valuation, is not convinced that it has a durable competitive advantage and prefers not to have exposure to the electric vehicle market via a single brand.

Instead he prefers to invest in companies that supply the critical components which are used to power electric cars. The trust's holdings include Belgium listed Umicore (Bel:UMI) which produces cathode materials used in rechargeable batteries and LEM (Swi:LEHN), a Swiss company that makes current and voltage transducers.

"We see exponential growth in the electric vehicle market over the next few years," says Mr Forster. "Less than 1 per cent of automotive sales are hybrids and electrics, but we think that could rise to as much as 30 per cent to 40 per cent by 2030, on the basis of our research and the studies we've seen."

The growing demand for electric and hybrid vehicles is being driven by several factors including government plans to ban petrol and diesel cars within the next 20 years, changing consumer behaviour, and increased investment by automotive companies.

"The proportion of diesel [car ownership] has gone down much quicker than expected," Mr Forster says. "People don't want to be stuck with a car that's losing its value very quickly."

Increased awareness of the environmental damage caused by plastic waste, meanwhile, is likely to drive demand for recycling and sustainable packaging solutions.

"We will see more recycling, [incentivised] either through bottle deposit schemes, increased taxes or municipals raising their recycling targets, and that’s going to require a big investment in infrastructure," explains Mr Forster. "More countries are considering plastic bottle deposit schemes, including the UK and France. Good recycling rates in non-deposit countries might be 40 per cent to 50 per cent, whereas in deposit markets it tends to be over 90 per cent."

Impax Environmental Markets owns Norwegian company Tomra Systems (Nor:TOM), which Mr Forster believes is well positioned to benefit from this trend. Tomra is the main supplier of reverse vending machines used for bottle deposit schemes with a 75 per cent market share.

The trust also invests in companies involved with sustainable food, agriculture and forestry such as US software company Trimble (US:TRMB). It provides positioning, wireless and software technology for farming and agricultural uses.

"By using GPS and related sensors, farmers can see the exact nutrient levels, moisture content and state of the land in each part of their fields," explains Mr Forster. "[This enables them to] use exactly the right amounts of fertiliser, pesticide and water to create optimum growth conditions for yield enhancement, but also reduce pollution because they are using less fertiliser and pesticide."

Although the trust has 60 holdings that are diversified across cyclical and defensive companies, its focus on environmental markets means certain sectors are not represented. These include telecoms, financials and healthcare. The lack of these types of businesses, along with the trust's bias to small and mid caps, means it is higher risk than MSCI All Companies World Index.

As the trust invests in listed equities its returns can be correlated to their movements. John Scott, chairman of Impax Environmental Markets, says that the recent strong run in global equity markets means it is uncertain as to "whether conditions will remain supportive of current asset prices".

The trust’s discount to NAV of about 4 per cent is significantly tighter than in January 2018 when it was trading at around 9 per cent and February 2016 when it was trading at about 14 per cent. The trust has not made any share buybacks since June 2017, and Mr Forster thinks the increased demand for its shares is due to growing interest in environmental markets and the trust's consistent good performance.

"There's strong momentum driving the environmental, social and governance category, which we see primarily as a growth opportunity," says Mr Forster. "But we can appeal to both types of investors [those that want growth and those more concerned about the environment]. We strongly believe that environmental markets are going to grow at a faster pace compared with the global economy, and this transition to a more sustainable economy is going to present a lot of great investment opportunities."

Performance 

Source: Impax Asset Management