Impax Environmental Markets (IEM ) fund managers have stuck by their decision not to hold Elon Musk’s Tesla over its ‘inadequate’ governance after another year of difficult performance.

The £1bn green fund saw net asset value (NAV) rise 4.5% in 2023 while the shares slumped 3.7%, miles behind the MSCI All Country World index’s 15.3% rise and FTSE Environmental Technology 100’s 18.3% gain, annual results show.

The drag came from a double-whammy of problems in key investment areas and zero exposure to the Magnificent Seven stocks, Alphabet, Apple, Amazon, Meta, Microsoft, Nvidia as well as Tesla, which is a constituent on both indices.

While IEM has a small and mid-cap focus, portfolio managers Bruce Jenkyn-Jones, Jon Forster and Fotis Chatzimichalakis can buy the electric vehicle manufacturer on account of its renewable exposure, but view its ‘governance practices as inadequate’. Shares in the volatile Nasdaq-listed stock charged 110% in 2023 but have retreated over a third since. 

The closed-end fund faced further headwinds from the areas it does invest in as stubborn inflation and high interest rates weighed on renewables exposed to financing, including independent power producers and solar energy.

Power producers not only faced rapidly rising interest rates but also higher costs for labour and materials, just as power prices declined.

‘For solar energy companies with residential exposure such as SolarEdge, higher interest rates translated into greater financing costs for consumers,’ they said. 

Compounding this issue in the US, its largest exposure at 54% of assets, was a new regulatory regime in California, the country’s largest solar panel market, while Europe, which makes up a third of assets, had to deal with Chinese oversupply.

More general fears around an economic slowdown hampered cyclical areas of the market, such as industrials and materials, which the trust has significant exposure to.

However, the managers struck a bullish tone, pointing out interest rates have peaked, providing a more supportive backdrop for smaller companies, and while geopolitical risks remain a concern, the portfolio’s underlying earnings growth is expected to remain robust and valuations remain attractive.

To take advantage of the ‘compelling’ valuations and predicted upturn in the market, the trust increased its gearing to 6.2% in 2023 from 2.1% the year before.

Over three years to date, shareholder returns have slumped 18% versus the MSCI ACWI’s 30% gain, while over five years, the shares have risen 36%, well behind the benchmark’s 65%.  

Will Creighton, analyst at Stifel, said even in the event of a mild recession ‘the consistent returns profiles of IEM’s holdings should bear out’.

JPMorgan Cazenove’s Christopher Brown highlighted the board’s ‘good governance’, with ‘significant’ share buybacks that saw the board buy 7.3% of share capital.

He added that while IEM ‘has a differentiated and thematic exposure in its portfolio that gives it little overlap to the MSCI ACWI’, the global market index represents a useful point of comparison for investors.

The board also announced a new tiered fee system of 0.45% per year on net assets above £1.4bn, with the previous fee structure charging 0.90% up to £475m and 0.65% a thereafter. The fund currently has net assets of £1.2bn, meaning the additional fee tier currently has no immediate impact.

At 383.5 today, the shares still stand on an 11% discount to NAV and have edged 3% higher since we tipped them in mid January.