Environmental equities make a comeback
Environmental equities, particularly renewable energy, have seen a significant recovery in the past 12-15 months on the back of the general recovery of the global equities market. The market perceives that the underlying fundamentals for renewable energy remain strong despite the challenges that continue to face the sector.
Renewable energy stocks are those that belong to companies whose businesses tap energy resources that are continually replenished such as sunlight, wind, rain and geothermal heat.
For Impax Asset Management (Impax AM), a specialist in environmental and natural resources investing, renewable energy stocks have pushed strong performances of some of their investment strategies during this period. Such stocks accounted for only 10%-20% of their total portfolio. Impax AM is a boutique under the umbrella of BNP Paribas Investment Partners.
In an interview with The Asset, Bruce Jenkyn-Jones, managing director, listed equities, Impax AM, says: "Other sectors such as energy efficiency, water, waste and recycling have been performing in line or better than global markets. But renewables underperformed massively from 2010-2012. So our funds were impacted by the renewable energy sector. But in the last 12-15 months, that sector has improved substantially due to a number of reasons."
Such improvements were brought on by a consolidation in the sector which in the past has seen excess capacity closing down; clearer regulations governing the environmental space and the rationalization of subsidies in the solar and wind segment that has driven down cost.
"In some cases, the solar sector is now able to compete with fossil fuel in places where there is no power grid including Africa, Latin America and India. Because the solar distribution chains are now in place, consumption is picking up. Overall, the sector is growing and the pricing for the producers and their cost structure are improving," Jenkyn-Jones says.
The water fund which Impax manages for BNPP IP (BNP Paribas Aqua Fund) is focussed on opportunities created by the scarcity of natural resources and the growing demand for cleaner, more efficient products and services, through both listed and private equity strategies. It has total assets under management of US$3.7 billion as of October 31 2013 for institutional and high net worth investors globally. Impax AM's investment team consists of 28 professionals, with an average of 18 years relevant experience.
"Renewable energy is only a small part of our funds but it can have a significant impact on the performance of some of our strategies. In the last 18 months, our global equity funds have outperformed the MSCI All Countries World Index by 5%-10% depending on the specific strategy," he observes.
Impax AM's water strategy has had strong numbers since its inception in January 2009. It posted a 49.4% return (all returns quoted for USD class) in the three years to July 31 this year, compared with the 43.2% gain by the MSCI World Index and the 36.6% increase in the FTSE Environmental Opportunities All-Share Index during the same period.
The firm's Asia strategy, known as the Asian Environmental Markets Fund, has also outperformed the regional index year-to-date, posting 10.4% as of September 2013 versus the MSCI AC Asia Pacific Ex Japan Index's 1.1%. The Asia strategy has been outperforming the regional index because of the emerging market content. In general, emerging markets have been performing well in 2012-2013 with the FTSE Emerging Market Index rising sharply to 17.9% year-to-date as of October 31 2013 after plummeting by -19.0% the previous year.
Impax AM also launched its food and agriculture fund on December 1 2012. Although it’s still early days, the fund has managed to raise £2.8 million and stood at 10.7% year-to-date as of September 2013, slightly lower than the MSCI AC World Index which registered at 14.4% in the same timeframe.
“The strongest message is good performance. In terms of the thematic trends, the cyclical recovery is helping relatively high beta mandates. In terms of asset raising, the most success we’re having is in the US,” Jenkyn-Jones notes.
Interest is coming from investors in the interphase of the shale gas sector in the US, particularly on pollution-related issues. Companies that offer clean-up solutions, hazardous waste disposal, as well as pick-and-shovel operations in the shale gas industry, are outperforming the market.
In Asia, there is also increasing awareness among institutional investors on the environmental sector. Today, there is a still a limited number of Asian entities that invest in environmental stocks -- mostly private groups and family offices. But for the first time, Impax AM has been invited by three local insurance companies based in Taiwan to make presentations, a positive indicator of investor interest.
In Hong Kong, investors are principally family groups that have specific interest in the environmental market. No substantial pick-up from institutional investors has been noted.
“Our feeling is that it will be similar to the UK and Europe 10 to 15 years ago when we started off with family offices and private groups as investors. But as the sector has demonstrated better performance, it has also become better known, and our assets have grown substantially. We’re hoping that in Asia-Pacific, something similar will happen, particularly in Hong Kong,” Jenkyn-Jones enthuses.
There has been better reception in Australia where Impax AM has won a mandate. “In Australia, we have a very busy schedule talking mainly to consultants and to the super funds. We already have a mandate with a local government super and I’m meeting four or five others, which is very encouraging,” he shares.
Investors are particularly keen on environmental stocks not only for diversification but on the thesis that resource scarcity is a major challenge.
“Typically, investors have looked at the supply side buying into commodities, the energy sector, and food and agriculture. Impax funds focus on investing in companies using resources more efficiently so it’s a real resource efficiency story which is another way of playing the same theme. In Australia where they’re very overweight resources, thisresource efficiency opportunity is attracting interest,” Jenkyn-Jones says.