Impax Environmental Markets (IEM ) fund manager Jon Forster has taken profits on soaring renewables as green investments take centre stage in the Covid-19 crisis, pushing the investment trust to double in size since the sell-off.
Forster said the pandemic had forced governments to ‘transform’ their approach to environmental policy.
‘That is partly to align with consumer demand but partly because they are looking at other tail risks [because of the pandemic] and what could also derail economic growth, and climate change is the biggest of those risks,’ he said.
Forster said after years of facing ‘cynicism’ in the investment community about the impact of climate change, there was now acceptance of the need ‘to either mitigate climate change or adapt to the consequences’.
A clamour for investments complying with environmental, social and governance (ESG) best practice helped IEM’s share price jump 38% and the net asset value (NAV) do slightly better with a gain of 39.5% last year.
That performance combined with the issuance of £200m of new shares as the stock traded at a small premium over NAV saw the trust double in size in 2020 with its market value leaping from £680m to £1.2bn once it had recovered from the pandemic crash last March.
The trust’s success helped shares in its fund manager, Impax (IPX), hit an all-time high of 885p this week after it reported a 25% surge in assets under management in the final three months of last year.
The ESG specialist took in £2.8bn of new client cash into its funds in the quarter while another £2.1bn was added through positive market movements that took total assets under management to a fresh record of £25.2bn.
Although the shares have slipped to 829p today, valuing Impax at £1bn, they have more than doubled in the past 12 months and are well up on the 510p at which BNP Paribas, its largest shareholder, sold more than 40% of its stake.
Forster, who runs IEM with co-manager Bruce Jenkyn-Jones, has taken profits in his more mainstream renewable assets that have seen valuations soar as stock pickers try to get a piece of the ESG action.
He said renewables and electric vehicles had been ‘hot areas’ and ‘valuations can be challenging so we have been taking a bit of profit in renewable energy and looking for new opportunities that are slightly off the radar compared to the investments the mainstream is looking to get exposure to’.
Forster (pictured) said he was still a ‘strong believer’ in the long-term prospects for energy efficiency due to tightening regulation and a wave of stimulus funding going into refurbishing buildings to make them more efficient.
However, he has been focusing on technology and software and ‘finding technology companies that are improving the industrial value chain’.
‘We are still looking for more opportunities and we are close to another investment around logistics software that manages the fragmented and increasingly complex distribution chains due to the move to e-commerce,’ he said.
Forster said he was also looking for more ‘defensive’ investments, such as in healthcare. Last year he invested in Nasdaq-listed Repligen (RGEN.O), which is a ‘filtration company that uses less energy water and chemicals in drug manufacture’.
‘It still has the energy efficiency investment case but exposure to a different market,’ he said.
The stimulus for green agendas has not just been prevalent in western economies, but also in emerging markets; China has adopted a 2060 carbon neutral target.
To get ahead of the pack, Forster has also shifted his focus from North America – which makes up 44% of the trust’s exposure – to Asia Pacific ‘where valuations are cheaper and there is more compelling growth’.
Although Joe Biden’s victory in the US presidential election and a Democratic ‘blue wave’ ensure there will be greater focus on green issues in Washington than under the Donald Trump administration, Forster is still sceptical about US valuations.
Pre-election, Biden announced a $2tn climate plan that would pump money into reducing fossil fuel and creating green jobs but Forster said while ‘the headlines are favourable…we need to see the detail and where the money is going to come from’.
‘The US offers good opportunities but [the region] along with renewables have had a strong performance in line with [those opportunities],’ he said.
‘Valuations are definitely challenging so there is a premium to global equities…the long-term average premium will be 25% but it is more like 40% so [green stocks] are on a big premium. A lot of that just strengthens our investment case but it also gives cause for some controlled caution which is why we have been taking profits in headline sectors.’
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