All information is at 30 June 2012 (unless otherwise stated) and unaudited.
DATA AND PERFORMANCE
Share price (pence)
Total fund size (NAV) ( m)
Market capitalisation (m)
Management fee (%)
22nd February 2002
Number of holdings (excluding unlisted)
Reuters RIC code
IEM Net Asset Value*
MSCI World Global Small Cap**
1 month %
3 months %
1 year %
3 year %
5 year %
7 year %
* Performance data incorporates undiluted NAV until exercise of warrants on 25 June 2010
** Total return
TOP TEN HOLDINGS
Ground source heat pumps
Hazardous waste treatment
Water control products
Air pollution control
Steam based energy efficiency
Medical waste treatment
US and Canada
Asia ex Japan
Environmental support services
Private and other
IMPAX ENVIRONMENTAL MARKETS plc
MANAGER'S COMMENTARY (Q2 2012)
Equity markets were weak in Q2 as a result of the escalation of the EU sovereign debt crisis and concerns about sustainability of growth in the US and China. Although defensive holdings outperformed, this was outweighed by underperformance of cyclical holdings with GDP sensitivity or exposure to commodity prices and construction markets.
High quality US defensive companies, such as LKQ (automotive recycling), Stericycle (medical waste treatment) and Ecolab (water treatment equipment), held up well in the market volatility and provided strong contributions to performance. M&A activity continued to drive performance with portfolio holding Tomra (reverse vending machines, Norway) diversifying its business through the purchase of Best. Q1 earnings ended well for the portfolio, with the majority of companies meeting or beating expectations.
The on-going macro uncertainty and market volatility continued to weigh on performance. Sims Metal Management (metal recycling, Australia) and Kingspan (insulation products, Ireland) underperformed due to commodity price and construction market exposures. Renewable stocks such as EDP Renovaveis (renewable IPP, Spain) and China High Speed Transmissions (wind turbine gearboxes, Hong Kong) remained weak as a result of overcapacity and regulation uncertainty.
Positioning and Outlook
Our quarterly environmental subsector outlook is flat across the quarter, with challenging short term fundamentals being balanced by attractive valuations. Certain energy efficiency and waste sub sectors are showing weaker fundamentals due to lower demand from cyclical end markets (in some cases at peak margins), in particular those linked to European end markets. Energy efficiency remains a key positive theme for the portfolio with early signs of recovery in US construction markets positive for buildings energy efficiency companies, although concerns about auto sales and global industrial activity weigh on performance of transport, industrial and power network efficiency companies. Water companies continue to look attractive due to positive, stable end markets. We remain cautious on renewables due to on-going overcapacity, although new sources of demand are appearing for solar and the long awaited consolidation of capacity appears to be gaining pace.
The UN conference on Sustainable Development, 'Rio+20', was held in June. Despite little government-level progress, commitment from the world's 58 largest cities to the reduction of CO2 emissions by more than 1bn tonnes by 2030 was agreed, as well as 692 individual sustainability commitments, amounting to pledges of $513bn. In Europe, an accord was reached for the new EU Energy Efficiency Directive, with energy distributors mandated to save 1.5% of annual sales volumes, and central governments to refurbish public buildings at a rate of 3% p.a. The directive also confirms the use of energy performance contracts (EPCs), estimated to reach €6bn in value every year. The EU also adopted its WEEE (Waste Electrical and Electronic Equipment) recast, requiring the EU-27 to collect and recycle 45% of WEEE waste by 2016 and 65% by 2019. The UK government agreed to make £1.3bn available every year for buildings energy efficiency program 'The Green Deal', while Scotland announced spending of £2bn over the next decade to improve home fuel efficiency. The German federal and state governments reached agreement on the disputed solar feed-in-tariff cuts of 20-30% and agreed to cap incentives when the total cumulative solar capacity reaches 52GW. The US Appeals Court upheld the EPA greenhouse gas (GHG) rules, thus approving the EPA's interpretation of regulating GHGs under the remit of the Clean Air Act and opening up the opportunity for future GHG rules on the transport and power sectors. In Asia, China announced that water conservation investment will reach 1.8trn Yuan in the 12th Five Year Plan, focusing on agricultural irrigation and strengthening water reservoirs. China also plans to renovate 92,300km of worn-out water-supply networks by 2015, to avoid the current 6bn metric tons of annual water leakage in urban areas.
Notwithstanding recent material steps to shore up the sovereign debt crisis in Europe, softening macro data and residual risks present a challenging backdrop. However, recent falls have made valuations more attractive. Given the mixed outlook, we are maintaining a well balanced portfolio of defensive holdings with visibility of earnings on the one hand, and high quality cyclical holdings with construction and commodity price exposure on the other. The portfolio is dominated by companies with proven track records, successful management teams and solid balance sheets, which are exposed to long term secular growth themes.
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