Jupiter Green (JGC) is trading at a steep discount despite many of its holdings continuing to perform well….

It’s been a challenging few months for investors of all stripes. The combination of inflation and prospective interest rate hikes, along with the conflict in Ukraine, have thrown markets into disarray. Unsurprisingly, ‘nowhere to hide’ has been plastered across newspapers as a result.

All this doom and gloom can make us forget that many long-term trends don’t appear to have changed much. At the same time, panic-selling, as with most rash behaviour, hasn’t tended to be particularly thoughtful or nuanced.

That means operationally robust companies which offer good services and technologies, have seen their share prices fall anyway. Other firms may find it harder to grow with rising costs of capital, but even taking that into account it seems that there have been instances where investors have oversold.

Companies focused on tackling environmental problems have been particularly susceptible to this dynamic. Like parts of the tech sector, some green companies saw their shares rocket up on the back of speculative investment during the pandemic. The sudden, rapid ascent of the MSCI World Environment Index after the market crash of March 2020 provides a simple illustration of this.

Some of those firms, like UK-listed Ceres Power and ITM Power, have seen their share prices plummet in the new year, as investors suddenly realised they may have got ahead of themselves in pushing valuations so high.

But other companies in the sector have been affected too, even as they continue to deliver robust financial results. US water treatment company Equova Water Technologies, for example, just released quarterly results showing a 23.1% increase in revenues and a 45.1% increase in net income compared to the same period last year. With the exception of 2020, where revenue was flat relative to the prior year because of the pandemic, the company has seen consistent sales growth over the past five years.

Equova is one of the larger holdings in the Jupiter Green (JGC) portfolio. The investment trust, which is managed by Jon Wallace, focuses on companies that provide products or services which aim to resolve vital environmental challenges: climate change and natural capital restoration.

That includes the sorts of green energy businesses you’d expect but also firms looking at things like food production, waste disposal, and chemicals manufacturing. In fact, the trust currently invests across six themes – the circular economy, green mobility, green buildings & industry, sustainable oceans and freshwater systems, sustainable agriculture and land ecosystems and clean energy.

JGC has traded at an average discount of -4.4% over the five years up to June 9th, including several extended periods where it was at a premium. However, that has changed in 2022 and the trust was trading at a discount of close to -17.5% in mid-June.

The discount widening to that extent may be an expression of the dynamic described above – investors panicking for various reasons and overselling as a result. What matters is whether the underlying investments of the trust remain good ones.

Looking at things through a macroeconomic lens, it’s hard to see the products and services the companies in the portfolio provide going out of fashion. From a policy perspective, there is increasing convergence around commitment to meeting key environmental targets, such as Net Zero.

Over 60 countries have now said they’ll target net-zero emissions by 2050. It’s easy to be sceptical about this but the UK government has estimated ‘green collar’ jobs could total 2m and exports £170bn by then, suggesting there’s a meaningful – and motivating – economic component to tackling emissions, rather than a purely practical one. There is also an increasing onus around reporting standards, which means companies will be required to report on their climate and nature-related impacts in the very near future.

Russia’s invasion of Ukraine has accelerated this trajectory. Moving away from using hydrocarbons isn’t just good for the environment, it’s also a way of stopping billions of pounds flowing to autocratic regimes every year. Perhaps more importantly, it often involves onshoring energy production – something that’s looking increasingly attractive after the pandemic exposed just how fragile global supply chains really are.

Of course, to actually benefit from these sorts of trends, the JGC team need to pick good companies. As the frothy markets of the past couple of years have shown, it doesn’t make much difference if you are operating in a market with macroeconomic tailwinds if you don’t show any sign of making money.

Fortunately Jon and his team have avoided the sorts of companies that saw their hype-driven valuations swell during the pandemic. Instead they’ve focused on businesses which, although often small and at an early stage, are either making money or are on the path to doing so. Indeed, companies like waste management firm Veolia or electronics manufacturer Monotholic Power, both of which sit in the trust’s top 10 holdings, continue to deliver strong profit numbers.

The trust is also sitting on a hefty cash pile and largely unused gearing facilities. Given how much valuations have fallen so far this year, this will come in handy if any opportunities present themselves – something Jon and his team have already taken advantage of by adding to existing holdings and investing in new companies.

The JGC team have always said the trust is for long-term investors and this remains the case. It seems likely the volatility we’ve seen in the markets so far this year will continue into the near future. However, for investors who are interested in an ESG-aware approach and are prepared to ride that volatility out and hold for the long-run, JGC remains an interesting option.
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Disclosure – Non-Independent Marketing Communication. This is a non-independent marketing communication commissioned by Jupiter Green. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
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