Weathering the storm: Impax Environmental Markets
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Reporting results for the six months ending June 2020, IEM has continued to attract new investors even during the Coronavirus crisis and could soon face capacity constraints…
Impax Environmental Markets (IEM) released its interim results for the six months ending 30 June. Over the period the trust saw it’s NAV per share fall 1.6%. This compares to a gain of 2.1% return from the global comparator benchmark, the MSCI ACWI. In share price terms IEM lost 4%, ending the period trading at 316.0p per share.
The global pandemic has caused unrest in global markets and the environmental sector has not been immune to this turbulence. IEM suffered during the market corrections in February and March which hit small and mid-cap companies particularly hard. The trust’s overweight positions in cyclical stocks, in industries that had been impacted by the ‘lockdown’, like the motor industry for example, were also a negative.
For the six month period ending 30 June 2020 the net revenue was £3.2m, equating to 1.43 pence per share. The board announced an interim dividend of 1.3 pence per share on the 30 July, and an expectation that the total dividend will be lower than the 3p paid in respect of the 2018 and 2019 financial years.
Despite these difficult market conditions IEM has maintained a discount/premium close to NAV, and indeed has been issuing equity throughout to satisfy investor demand for the trust. Throughout the six month period the trust has traded at an average premium of 3.7%.
The board has agreed with Impax Asset Management that they will not seek further share issuance capacity before the end of 2020, owing to the need to manage overall flows into the strategy.
The company currently has approximately issuance powers of 5% of shares currently in issue, but the board notes that, should all the available share issuance capacity be used before the end of 2020, there is the prospect of an increasing share price premium to net asset value developing, which the board would find hard to control in these circumstances.
IEM has been a standout performer within the AIC Environmental sector, dramatically outperforming its peers. Currently, only three trusts sit in the sector, however IEM has delivered returns more than double that of its peers.
Relative to the AIC Global peer group, the trust also stands out as an excellent performer. In fact, only four of the 16 trusts in that sector have performed more strongly over the past five years.
In comparison to the global comparator benchmark, the MSCI ACWI, the trust has outperformed in four the past five calendar years, as can be seen below.
Despite a difficult six months, during which the trust has been penalised by its exposure to cyclical smaller companies, IEM has rebounded strongly from the lows of February and March.
The portfolio remains a solid diversifier, offering exposure to some highly specialised companies not found in other global generalist trusts or funds.
The demand for the managers’ expertise in the area has been illustrated throughout 2020 with the board being able to issue £121.2m worth of shares throughout the reporting period.
Assuming demand for shares continues, the fact that the board is discussing capacity constraints is interesting, as once the trust ceases to issue new shares any further demand is likely to be a tailwind for the premium it already trades upon.
At the current share price, the trust yields 0.8%. The board have announced an interim dividend of 1.3 pence per share, however they anticipate the full year dividend to be marginally lower than in 2019 and 2018 (3p).
This is not surprising given the ‘dividend drought’ we are seeing across global markets, as well as the fact that income is not a key objective for the managers or board.
The central thesis surrounding the investment approach of the trust is that the global economy is going through a transition from a depletive economic model to a sustainable one, where the growth of economies is achieved with an improvement of social and environmental outcomes.
This scenario has been further accelerated by the pandemic, which brought into sharp relief the danger of ignoring systemic risks facing society; climate change being the most prominent.
In our view it is no longer politically acceptable to ‘kick the can down the road’ and politicians who do so will not be rewarded at the ballot.
As the chairman notes in his report, “Unlike during the 2008-09 financial crisis, environmental considerations have been a prominent feature in many of the stimulus packages…that governments have launched”.
With these things in mind, we feel that when the COVID crisis reaches its conclusion, and people’s attention returns to the broader environmental challenges faced by the world – a world which we all saw through clearer skies at the height of the pandemic – Impax is well positioned to benefit from the tailwind which this presents for the sectors, themes, and companies to which it is exposed.
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