Comment: Unusual trust that offers long-term Impax

FOR the stock market’s energy and natural resource sectors, this has been a summer to forget. Share price falls have been harsh, and growing worries of a global slowdown suggest no early recovery may be in sight.

Bill Jamieson. Picture: Ian Rutherford
Bill Jamieson. Picture: Ian Rutherford
Bill Jamieson. Picture: Ian Rutherford

That should surely cast a shadow over one of the more eclectic investment trusts – Impax Environmental Markets. This £383 million fund looks heavily invested in the energy and natural resource sectors. But the focus is on environmental and resource efficiency, not energy and natural resources per se. Its cutting edge is on those technologies that make more effective use of the world’s resources.

It doesn’t slot easily into the conventional investment boxes such as “defensive income”, “aggressive” or “cautious managed”. Its objective is to enable investors to benefit from growth in the markets for cleaner or more efficient delivery of basic services of energy, water and waste.

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Investments are made predominantly in quoted firms that provide, use, implement or advise on technology-based systems, products or services in environmental markets, particularly those of alternative energy and energy efficiency, water treatment and pollution control, waste technology and resource management.

In the year to last week, shares in Impax have held up better than many may have feared, with a fall of 3.9 per cent, compared with a drop of around 10 per cent in the FTSE 100.

Over three years the trust is up by 50.3 per cent and over five years by 33.4 per cent – by no means top of the class over the trust universe as a whole, but strikingly better than others in the environmental space.

The trust, managed by Bruce Jenkyn-Jones, says its low correlation to oil prices has stood it in good stead while its mid/small cap bias has helped performance as large-capitalisation behemoths were the first to be sold off. It also had higher than usual cash positions going into the summer.

While the industrial slowdown in China has disconcerted many, Impax says this has played to its investment stance, which has been anticipating a shift away from high energy and commodity-intensive investments into the energy efficiency and automation sectors. The trust has been overweight in water treatment and infrastructure – again, not among the high-flying market sectors, but ones whose defensive qualities have come to the fore.

It has been hit by the 19 per cent fall last month in the renewables sector, the decline particularly acute in China where much of the industry is now based.

In the food and agriculture sectors, the trust’s focus on efficient farming equipment and the food retail end of the supply chain protected it from the underperformance of commodity-related agriculture names.

The report for the six months to end-June sets out a helpful summary of “contributors” and “detractors”. Among the former, the fund’s buildings and industrial energy efficiency holdings continued to benefit from the cyclical recovery of industrial and construction activity. “Detractors” included water utilities – often considered bond proxies. Here shares were weaker, driven by investors selling out of equities in expectation of interest rate rises. But, says Impax, this presents opportunities as its business models should not be damaged by rising rates.

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Efficient lighting markets also disappointed, with Aixtron of Germany hit by a delayed capital expenditure cycle while Dialight in the UK experienced a reduced level of retrofit orders from oil and gas customers.

The trust’s top five holdings are currently led by US-based LKQ, accounting for 3.3 per cent of assets. It is the largest provider of recycled and aftermarket vehicle parts in the US. Not far behind is US-based Pall (2.1 per cent of the fund), a filtration and fluid management business that is the subject of a takeover offer from Danaher.

Third-largest holding is Kingspan of Ireland, a manufacturer of insulated panels and boards and environmental housing products such as solar hot water and rainwater harvesting.

Fourth is Xylem, providing a range of water infrastructure and treatment products, while the fifth-largest holding is fellow US firm Stericycle, which manages regulated waste and provides related and complementary services.

Shares in Impax at 145.25p stand on a discount of 11.2 per cent and yield 0.96 per cent. This has not, and never has been, a quick return trust. Indeed, if ever a trust merited the description “long-term holding” it is Impax. It is neither an income nor hi-tech growth fund but one with a range of holdings in activities critical to a cleaner and more sustainable world. And it is this quality that arguably lies at the heart of its resilience this summer – and its longer-term appeal.