Out-of-favour approach given vote of confidence by board
This investment trust, one of our ACE 40 options, has suffered due to its style of investing falling out of favour. Alex Watts runs through the results, which include an upcoming manager retirement and the board pledging support.
4th April 2025 11:09
by Alex Watts from interactive investor
Returns for Impax Environmental Markets Ord (LSE:IEM) were negative in its latest financial year to 31 December 2024, while its MSCI All Country World Index benchmark rose nearly 20%.
Share price total returns of -2.6% lagged further given a widening of the discount.
The strong performance of a few mega-cap companies (many of which IEM cannot invest in given its approach) made outperformance difficult. Over 50% of returns in 2024 came from just 10 stocks (the Magnificent Seven, plus three others).
However, IEM also underperformed its secondary FTSE Environmental Tech benchmark (returning 16.8%), which is only exposed to Tesla Inc (NASDAQ:TSLA) of the Magnificent Seven.
The effect of gearing was mildly negative, while substantial buybacks provided a small uplift to returns.
The trust’s troubles triggered a review by the independent board of the manager’s adequacy and processes, which ultimately reconfirmed the long-term prospects of the differentiated and environmentally focused strategy, in spite of the current headwinds.
Still, in what is a meaningful perk of the investment trust structure, irrespective from the conclusions of the board, investors will have their chance to vote for or against the continuation of the trust at the upcoming AGM on 20 May 2025 (as is the case for IEM every third year).
The numbers in detail (for financial year to 31 December 2024)
Net asset value (NAV) Return: -0.4%
Share Price Return: -2.6%
Index Return (MSCI ACWI): +19.6%
Index Return (FTSE ET100): +16.8%
Discount: -9.8% (1.9% vs prior year)
Dividend: 5p (+8.7% vs prior year)
Gearing: 7.6% (+1.4% vs prior year)
Outlook
The manager notes the apparent shift in broader equity markets beyond the large-cap US tech names previously driving indices. Economic instability and threats to US growth brought on by the ensuing trade war contrast with the manager’s perception of green shoots among more attractively valued European markets. IEM reassert their focus on buying reasonably valued, well-run businesses supported by long-term structural trends in environmental markets.
Over the one-year period, strength within IEM’s portfolio came from various sources, with Industrial names, such as Clean Harbors Inc (NYSE:CLH), a provider of environmental and industrial services including hazardous waste management and industrial cleaning; Contemporary Amperex Technology (CATL), a Chinese battery manufacturer; and Brambles Ltd (ASX:BXB), a logistics business that specialises in the pooling of reusable pallets and crates. Construction and digital infrastructure companies were also cited positively. Negative contribution was particularly concentrated within renewables, which suffered from persistently high base rates as well as negative sentiment following Trump’s re-election.
Discount
The discount, which moved from -7.9% to -9.8% in the year, has shifted somewhat in step with the discounts across the wider trust sector. It remains close to this level post-year end.
Portfolio
IEM’s portfolio spans circa 60 names, and the focus has been on consolidating into higher-conviction holdings. Accordingly, turnover of just over 20% reflected seven new holdings and 11 disposals, with some exits driven by valuation discipline and others where conviction waned.
The inherent biases in the portfolio remain, including towards small/mid-cap, which makes up around 75% of the portfolio. Sector allocation also remains much differentiated from global indices, with around four times the allocation to industrials (circa 45%), and significant overweight positions in Utilities (c.10%) and Materials (c.10%), while not allocating to conventional energy or financials.
Geographic exposure retains a small bias away from the US (62% of portfolio), while favouring Europe (31%).
Gearing
Gearing of 7.6% reflects slightly increased borrowing since the prior year. This provided a small negative performance effect in 2024, while actual costs of borrowing also marginally ate into returns.
Corporate/management changes
The board of IEM carried out a review of many aspects of the manager’s investment strategy and resourcing. Also announced was the upcoming retirement of Bruce Jenkyn-Jones (co-portfolio manager and co-chief investment officer of Impax) in July 2026. He will be succeeded by Jon Forster and Fotis Chatzimichalakis. In light of this succession planning, and in terms of both resourcing and strategy, the board have gained confidence that the manager’s process and substantial skill remains sufficient.
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The results highlight another year of underperformance for IEM. Again in 2024, in addition to negative macro and political influences for some of the themes the trust is exposed to, the adherence to investing in pure-play companies contributing to environmental betterment left minimal scope to outperform a concentrated market driven by segments largely un-investable to the managers.
Recognising the challenge of benchmarking performance of IEM’s differentiated portfolio, with a 99% active share and an investment approach tied to environmental factors, it’s logical that the board and manager are working to identify more appropriate comparators than the MSCI All Country World Index and FTSE Environmental Tech indices for future use.
Investors will be left dissatisfied with the weakness of absolute and relative performance, both on a share price and NAV basis. Adding to poor portfolio performance, the persisting discount will be a frustration and was an obstacle to price returns in the period, although it is pleasing to see the company employ a meaningful amount of buybacks (nearly 15% in the year) in an attempt to tackle the discount.
While hard to track from outside looking in, it is interesting to see the emergence of activist investor Saba Capital on the share register late in the last year.
Another significant development worth highlighting is the upcoming retirement of Bruce Jenkyn-Jones after 26 years at Impax. While his departure will be significant given his huge experience and status in the sphere of environmental investing as an early adopter of the practice within the UK, a long transition period until mid-2026 and his replacement by co-managers Forster and Chatzimichalakis, could ease the adjustment.
Aside from performance, it is worth remembering that IEM seeks to invest in companies that make a positive contribution to environmental themes and, under the new regulatory framework, this has now been manifested in an SDR Impact label – one of the first investment trusts to achieve this accolade.
The Sustainability Disclosures Requirements (SDR) and investment labelling regime is a framework that all UK authorised companies must abide by when selling and marketing funds with sustainable characteristics to UK retail investors.
The comprehensive and empirical impact reporting shows the positive contributions of IEM’s portfolio in the real world and investors can read this via Impax’s thorough impact reporting. The trust’s sustainable objectives and Impax’s heritage in this area is a key factor that would lead an investor to IEM, as opposed to another mainstream global equity option, however investors must be aware of the wildly different portfolio biases and performance profile that such an environmentally committed investment strategy must levy in achieving its goals.
While the near-term picture for many environmental themes, such as renewable energy, may feel threatened under the new US administration, the managers retain their conviction that the structural drivers behind the environmental transition that underpin the investment thesis for IEM will persist over the long term.
IEM is one of our ACE 40 choices, a list of fund ideas from the wider sustainable investment universe.
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