Impax Environmental Markets

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1 is a client of Kepler Trust Intelligence. Material produced by Kepler Trust Intelligence should be considered as factual information only and not an indication as to the desirability or appropriateness of investing in the Impax Environmental Markets Summary Generating good long-term investment returns is often predicated on long term thinking. investment objective is unequivocally aligned to this. The team seek to exploit their informational edge in small and mid-cap stocks in the energy, water, waste & resource recovery, and food and agriculture sectors. By being specialists in niche areas, Impax often find themselves very familiar with the investment universe and already fully invested, at a point that a new investment theme arrives on the horizon for mainstream managers. As such IEM offers exposures that are unlikely to be found in a material way in any generalist global funds or trusts One such company, held at launch and in the portfolio today is Tomra. Tomra is now the dominant supplier of machinery to tackle the war on plastics. Reverse Vending Machines (RVMs) are probably the only way for countries to achieve EU targets for 9 recycling under the EU Plastics Strategy. Tomra s R&D efforts have meant that they are now world leaders in robotic vision and sensing equipment, which has seen them expand their end markets significantly. Tomra is a good illustration of an Impax owned stock. As at 31st Dec 26 Impax was the 16th biggest investor in the company, at a point when 34.9 of the company was held by foreign (ie non-norwegian) entities. As at 31st Dec 217, Impax was the tenth biggest investor and 77.3 of the company was owned by foreign entities. IEM has been a strong performer for much of the last five years. The NAV has performed relative to the MSCI ACWI, but also relative to global generalist peers in the investment trust and open-ended sectors. Until January this year, the trust was outperforming both the benchmark and peer groups. However, during 218 IEM has struggled thanks to a combination of small-cap underperformance (especially a lack of large cap tech), being overweight industrials and no healthcare, as well as being underweight $US. The portfolio has also experienced weakness in the lighting and water utilities sectors which have contributed to the benchmark headwinds. IEM recently adjusted its gearing arrangements, replacing a flexible revolving credit facility with a fixed rate loan. It now has a five-year fixed rate loan of 15m and US$2m, with interest rates on the loans of 2.91 and 4.54 per annum respectively. The current level of net gearing is 4, according to Morningstar. Update 4 December 218 Analysts: William Heathcoat Amory +44 () Pascal Dowling +44 () Thomas McMahon, CFA +44 () William Sobczak +44 () Kepler Partners is not authorised to make recommendations to Retail Clients. This report is based on factual information only. The material contained on this site is factual and provided for general informational purposes only. It is not an invitation or inducement to buy, sell or subscribe to any product described, nor is it a statement as to the suitability or otherwise of any investments for any person. The material on this site does not constitute a financial promotion within the meaning of the FCA rules or the financial promotions order. Persons wishing to invest in any of the securities discussed in the website should take their own independent advice with regard to the suitability of such investments and the tax consequences of such investment. IEM s discount continues to narrow. Having bought back 1m shares over the first half of 217, the board have not had to enter the market since then. The discount has narrowed in considerably of its own accord, and the shares now trade at a premium to NAV of 2.3. Portfolio IEM was launched in 22, four years after the establishment of Impax Asset management. Tony Blair was prime minister, and world stock markets were still 1

2 is a client of Kepler Trust Intelligence. Material produced by Kepler Trust Intelligence should grappling with the fallout from the dot.com bubble. With Impax Asset Management celebrating it s 2 year anniversary this year, we thought it might be interesting to take a look at the evolution of the IEM portfolio, the development of the universe and at some of the stocks that the managers have owned. Unusually for a fund with a 16 year track record, the same managers (Bruce Jenkyn- Jones and Jon Forster) have been at the helm since launch, meaning the track record of stock picks is entirely clean, and fully attributable. Expanding opportunity set Impax s team maintain a watching brief around the world for companies which fit their investment as well as environmental criteria. As companies develop, and as the research pipeline permits, this universe is expected to expand over time. Indeed, when the trust first launched, the managers classified the portfolio into three sector buckets. These sectors have now developed to such an extent that they have subsequently been broadened to six, with an additional sector that of Food, Agriculture and Forestry - added. The graph below shows the portfolio breakdown using the original 22 classifications. Although on the surface it looks like there has been relatively little change to the allocations over time, this analysis masks huge changes within the portfolio, but also the underlying investment dynamics of each sector bucket. For example, in the Energy sector, the emphasis back in 22 was very much towards alternative energy generators, whilst today the far greatest exposure (35 of NAV) is towards energy efficiency. As Impax have noted, they have tried to lean more on investing to benefit from the regulatory ratchet, not the subsidy spigot - observing that investors have often been blindsided when governments change tack and shut off costly subsidy regimes. Fig.1: Sector Breakdown of NAV IEM Portfolio Breakdown by Impax defined sector Renewable & Alternative Energy, Energy Efficiency Source: Impax, Kepler Partners At launch and latest breakdown Water Infrastructure & Technologies, Pollution Control Waste Management & Technologies, Environmental Support Services Food, Agriculture & Forestry 28/6/22 3/9/218 Within these sub-sectors, the number of investable companies having expanded materially. In a recent analysis provided by Impax, over the twenty years the team has existed the number of companies in the universe has expanded from 25 to 2. This universe includes companies which meet the lower 2 threshold of environmental exposure set for some of Impax s strategies. IEM s portfolio companies must have at least 5 of their revenues exposed to what the Impax team view as environmental markets. Aside from the sheer number of opportunities that the trust is potentially exposed to, of more relevance is that the geographic range has also expanded massively. As the graph below illustrates, both as a result of increased resource put to work in Asia, as well as a local understanding that resource efficiency is important to company profitability over the long term, the investment universe in Asia has expanded dramatically. Impax were early adopters of China and so exposure to the Asia Pacific region has increased markedly from c 5 ( rest of world, ex N America and Europe) at launch to the current level of 2, the soft-limit on developing market exposure. Fig.2: Impax Universe Asia-Pacific No. of companies Number of companies in Impax's Asia-Pacific Universe Source: Impax Asset Management Comparison over time Japan Asia ex-japan Total Asia Impax s belief that the transition to a more sustainable economy will continue to disrupt an ever-larger part of the global economy, means that there is likely to be an everexpanding opportunity set. Impax aim to invest in those which will outperform over the longer term, whilst avoiding those which are unable or unwilling to adapt to these changes. Long term investing Impax s investment thesis rests on their identifying small and mid-cap stocks which are specialists (and often innovators) in their markets, and aims to hold them for the long term. Impax s historic turnover ratio of 21 supports their claims of being longer-term investors, given that it implies an average holding period of c.5 years, which is 2

3 is a client of Kepler Trust Intelligence. Material produced by Kepler Trust Intelligence should considerably lower / longer than the average for equity investment trusts of 34, or a three year holding period (data from JPMorgan Cazenove). Even this relatively low turnover is probably exaggerated by the team s valuation driven investment methodology. The team tend trim into strength and invest more into weak share prices if they are still confident on the company s performance. Given the focus on small and mid-caps, and being a niche manager, the team are usually fairly confident that they understand a company s prospects better than the more generalist investor. Reviewing the launch portfolio of IEM in 22, only one company remains in the portfolio today. Tomra was held at launch, and continued to feature in the portfolio today (although it has not been held over the entire history of the trust). The original qualifier (aside from the management, financials etc) was that it was a reverse vending machine (RVM) manufacturer owned because of it s specialist expertise in RVMs, especially with Germany pioneering their first deposit scheme. As the team expected, the company has benefitted handsomely from its proprietary technology, reflected in it s now 75 market share. Tomra is now the dominant supplier of machinery to tackle the war on plastics. Reverse Vending Machines (RVMs) are probably the only way for countries to achieve EU targets for 9 recycling under the EU Plastics Strategy. At the same time as it has increased its dominance in it s niche, Tomra has expanded the range of products since 22. Tomra now a market leader in sorting technology sold into materials recycling facilities. Tomra s R&D efforts have meant that they are now world leaders in robotic vision and sensing equipment, which has seen them expand their end markets significantly, and now have a significant presence and growing business within the food industry grading, sorting and optimising fruit and vegetables, as well as the mining industry. We understand that their scanning technology has been used in the Fig.3: Tomra Share Price Since 22 (Iem First Investment) Tomra Systems share price total return since Tomra Systems recovery of half of the last ten biggest diamonds found in recent years. Tomra is a good stock example. As at 31st Dec 26 (the earliest date on which their report and accounts are available on their website), Impax was the 16th biggest investor in the company. Overall 34.9 of the company was held by foreign (ie non-norwegian) entities. As at 31st Dec 217, Impax was the tenth biggest investor and 77.3 of the company was owned by foreign entities. The other, perhaps better-known stock that has been part of the portfolio since launch is Vestas Wind Systems which was 9.2 of NAV on day one. The share price performance of the company has been more volatile reflecting its operating performance. IEM has had an investment in the company over the entire period, but exposure has varied somewhat over time. Since 212, the company has been a very strong investment for the Trust and has made a strong contribution to the performance shareholders have witnessed since then. Fig.4: Vestas Share Price Since 22 (IEM First Investment) Vestas Wind Systems share price total return since Vestas Wind Systems Looking forward, one emerging trend that is rapidly becoming mainstream is that of electric vehicles (EV). Many generalist investors aim to play this theme, but in many cases use rather blunt instruments such as Tesla shares which the Impax team have always viewed as too expensive for their valuation driven investment methodology. Impax believe that EVs will play an increasingly large part in our lives. For them, this is part of a much larger electronic theme which they have been investing in for three years through electronic controls, and energy efficiency. Stocks in their portfolio that they have held / continue to hold include Umicore, a materials company that supplies materials into the cathode lithium ion batteries; LEM, which make transducers for measuring and therefore controls the current around the drive train - with more than 5 market share; and Delta Electronics Thailand, which manufactures charging infrastructure and the vehicle s power management hardware. 3

4 is a client of Kepler Trust Intelligence. Material produced by Kepler Trust Intelligence should Other emerging themes that the managers have invested in, but believe will become of more general interest in years to come, include a push for connectivity within manufacturing processes (aka the internet of things [IoT]). One company that the team have identified is a pureplay software business called PTC, which is US headquartered and listed on Nasdaq, which Impax expect to be a big beneficiary of IoT, particularly in manufacturing plants where the company aims to help increase productivity, efficiency, flexibility, and safety. Elsewhere the managers believe that biochemicals are very interesting area. The thesis is that with environmental regulations starting to significantly impact chemical businesses (witness Bayer s travails with several European countries discussing banning Roundup). Impax have been researching dominant companies in niches with attractive returns. They have been looking for products with better performance, and a lower environmental footprint compared to petrochemical based products. Companies in the portfolio include Corbion, a Dutch food and biochemicals company headquartered in Amsterdam. It produces bioingredient-based foods, chemicals derived from organic acids, and lactic acid based solutions for the food, chemical and pharmaceutical industries. Another investment is Borregard, a Norwegian company that manufactures products based on the different components in wood. The company uses a biorefinery to produce core products such as speciality cellulose and lignin. Impax have observed over the years that the most attractive investment point is when a profitable company with established technology is beginning to scale up. As such, this is not a portfolio of pre-profitability, blue-sky stocks as at 3th June for example, 96 of the portfolio was profitable, based on the next 12 months earnings estimates. It is noteworthy that the superior growth characteristics of the portfolio have historically been reflected in the average P/E premium to the wider market. Following what has been an absolute and relative derating, the portfolio s (forward) P/E is 16x (a 14 premium relative to the MSC AC World, well below the average of 2). As illustrated in the graph below, the P/E premium that the portfolio trades at, is well below the long-term average. As we note above, the managers are bottom up stock pickers, with a valuation driven methodology. This means that (as has been the case for quite a while) the managers are significantly underweight the US relative to the MSCI AC World index. Europe is the largest overweight, viewed by the managers as fairly valued and exposure to Asia, which the team view as good value, at the 2 soft cap. Fig.5: Regional Allocation Source: Impax North America Gearing IEM has recently adjusted its gearing arrangements, replacing a flexible revolving credit facility with a fixed rate loan. It now has a five year fixed rate loan of 15m and US$2m, with interest rates on the loans of 2.91 and 4.54 per annum respectively. In addition, the company also has a new multicurrency revolving credit facility a current committed amount of 2.5m with an uncommitted accordion option to increase the facility by 17.5 million. The current level of net gearing is 4, according to Morningstar. Returns Asset allocation relative to MSCI ACWI Europe Fig.6: Net Gearing (1 = ungeared) Asia Pacific ex Japan Japan ROW Cash IEM MSCI ACWI Gearing IEM has been a strong performer for much of the last five years. The graph below illustrates how the NAV has performed relative to the MSCI ACWI, but also relative to global generalist peers in the investment trust and open-ended sectors. Until January this year, the trust was outperforming both the benchmark and peer groups, 4

5 is a client of Kepler Trust Intelligence. Material produced by Kepler Trust Intelligence should no mean feat given the average investment trust return is skewed by Scottish Mortgage which has delivered very impressive returns. As we discuss below, IEM has struggled over the current year. Fig.7: Five Year Performance NAV Performance vs MSCI ACWI & Global Trusts/ Funds we understand from Impax that they expect to see faster growth (based on earnings) in 219 relative to global equities. The graph below shows that the trust has benefited from rallying markets in the past, with 216 a bumper year for the trust with outperformance over the MSCI ACWI index of 8.6, further built on by 3.3 outperformance during 217. However, this cyclicality was most painfully felt in 211 when IEM fell close to three times as much as the wider market in 211, the year the European sovereign debt crisis intensified causing a global equity correction Fig.9: Discrete Calendar Year Nav Tr Performance NAV vs MSCI ACWI & peers IEM NAV MSCI ACWI Morningstar IT Global IA OE Global 2 Given the portfolio tends to have a cyclical tilt, the managers like to balance this exposure by ensuring they also invest in more defensive areas of their universe (such as water) relative to the wider MSCI ACWI index. However, in the past year s rising interest rate environment, this strategy has come slightly unstuck and the defensive side of the portfolio has struggled. Weakness in the lighting and water utilities sectors have been the key negative contributors to performance so far this calendar year. Relative to the MSCI ACWI, IEM has struggled to keep up thanks to a combination of small cap underperformance (especially a lack of large cap tech), being overweight industrials and having no healthcare, as well as being underweight $US. Fig.8: One Year Performance NAV Performance vs MSCI ACWI & Global Trusts/ Funds Jan '18 Apr '18 Jul '18 Oct '18 IEM NAV MSCI ACWI Morningstar IT Global IA OE Global The managers note that the overall portfolio is more cyclical than the index, and its performance over 218 reflects this. Despite this relatively weak performance, Dividend IEM (Cum Fair NAV) Morningstar IT Global NAV The trust s primary objective is capital growth, but it is the board s intention to pay out substantially all earnings by way of dividends. Given that the majority of the trust s holdings invest excess cash back into their own businesses to fund future growth (rather than paying dividends), it will come as little surprise that IEM offers a low yield of.9. Management MSCI ACWI IA OE Global Impax Asset Management was established in 1998 and now manages 11.9bn (as at 31 October 18) across a range of strategies. Bruce Jenkyn-Jones is co-head of the listed equities side of Impax having joined in Jon Forster joined Impax in 2 and together they have overall responsibility for the trust. Ian Simm, co-founder of Impax, chairs the investment committee. The trust has significant research resources, with 16 investment professionals focused on the portfolio and its core themes, and the group majors on this in its marketing effort as a key advantage it has over broader generalist trusts investing in the same area, without the same specialist expertise. The team meet once a week to discuss stock ideas for the portfolio and update their macro views once a quarter. 5

6 is a client of Kepler Trust Intelligence. Material produced by Kepler Trust Intelligence should In January 218, Impax Asset Management completed the acquisition of the US-based Pax World Management LLC. Impax and Pax have had a close relationship over the years, having worked together on the Pax Global Environmental Markets fund - to which Impax has served as sub-advisor since its inception in 28. We understand that the merger has had no effect on IEM itself as the team will remain separate and there will be no change to either the investment process or personnel. Discount IEM s discount continues to narrow, as the graph below shows and the shares trade at a premium to global peers. Historically, the trust had a discount control mechanism in place, which saw the board buying back shares at around 1. The board were relatively active in this regard, and as a result, the trust traded at a persistent but steady discount of around 1 for the last few years. three months of the date of meeting for the reorganisation, winding up or reconstruction of the company. Charges From 1 October 217 there has been a new fee regime. In respect of the first 475m of the Company s net assets, the manager will be due.9 of such net assets; and in respect of the Company s net assets exceeding 475m,.65 will be charged. With net assets of c 463m currently, this does offer shareholders an immediate reduction in fees, but there is clear potential for average fees to fall as the company grows larger. The ongoing charges figure (calculated along AIC guidelines) at the time of the interims at 3th June 218 was 1.6. This compares with the simple average OCF for the IT Global sector of.74. Having bought back 1m shares over the first half of 217, the board have not had to enter the market since then. As the graph below shows, the discount has narrowed in considerably of its own accord, and currently stands at a premium of 1.3. In total there are 45.7m shares in treasury, representing 16 of share capital. We compare the discount with the global sector average discount in the graph below, illustrating that discounts across the board have narrowed across the board. As a backstop towards protecting the discount widening out too far over the longer term, the company has a continuation vote every three years, the most recent in 216 being supported by 99 of investors, and the next one will be in May 219. A resolution that the company continue in existence will be proposed as an ordinary resolution. In the event that any such continuation resolution is not passed the directors are required to put forward proposals within Fig.1: Discount To Nav 5 (discount) / premium to NAV Morningstar IT Global 6

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