With new funds springing up or existing ones growing, the winds seem to be blowing favourably again for cleantech investments.
One of the more established players in the environmental technology sector is London-based Impax Asset Management Group (IAM), which was founded by CEO Ian Simm in 1998 and today manages investments on behalf of more than 100 institutional investors worldwide.
About 50% of its business is undertaken directly with institutions, 25% stems from private wealth, while mutual funds, which are sold to retail, make up the last quarter. It is managing money for 20 pension funds, mostly European, but also an Australian local government superannuation and a Japanese pension fund.
Driven by the assumption that expanding environmental markets have aggregate annual revenues of around $500bn (€355.9bn) and compound annual growth rates of 10-20%, IAM is seeking to exploit a number of trends, including rising fossil fuel prices and the associated demand for alternative energy and energy efficiency, climate change, water scarcity, water pollution, economic waste recycling and society’s determination to reduce pollution (in particular air pollution).
Simm estimates that today about 8% of stock markets worldwide are represented by listed companies active in environmental markets with an aggregate market capitalisation of about $4trn. “There are now 1,500 quoted companies and many more private companies active in this space, which means that, for us, the number of companies we could invest in is growing every day,” he says. “And institutional investors have become increasingly convinced that it is worth being overweight in these sectors.”
This is reflected in IAM’s assets under management, which have grown from £500m in March 2006 and £1.8bn in September 2010 to £2.4bn (€2.8bn) as of 30 April 2011.
IAM started its business in 1998, advising on a $25m private equity solar fund. In 1999, it set up its first listed-equity mutual fund, investing across environmental markets including water treatment, recycling, energy efficiency and renewables. Unlike many other funds, therefore, IAM has been investing in the whole spectrum of environmental markets right from the start. More recently it has focused on water and energy efficiency due to high confidence in market growth levels in those two areas relative to renewable energy.
Although the amount of investment in environmental markets tends to make up only a fraction of institutional portfolios, IAM is not worried. “When success comes through, investors are willing to increase their allocation,” says Simm. “One of our pension fund clients, for example, started off with a £5m (€5.7m) investment with us almost 10 years ago. This has risen to over £90m today. But many of our clients are still in the first stage where they are waiting to see the result before they make a bigger commitment. We are keen to work for significantly-sized institutions because we can then grow our business over time without having to dilute our client services.”
IAM has made a decision to limit itself to a small number of strategies. It runs four long-only listed-equity strategies (an Asia fund, a water fund and two global funds, one of which focuses on small and mid-caps); one long/short absolute return strategy; and one private equity strategy.
IAM claims some benefits over large multi-strategy houses. Simm believes that it is easier for a boutique manager to communicate to its clients and to attract and retain the type of investors it wants to have. He also thinks that having only a small number of products is beneficial because, in the eyes of investors, more expertise will be dedicated to them.
“We live in a world where investors are increasingly looking for specific expertise implemented in a consistent way,” he says. “And we have strong credentials in doing that.”
However, being relatively small also brings some challenges, such as the lack of a distribution network and higher fixed costs, which have an adverse impact on the margins.
For these reasons, IAM entered into a distribution partnership with global banking group BNP Paribas over five years ago. “This has helped us to win clients in continental Europe and in Asia,” says Simm. IAM has also established a partnership with FTSE to develop and manage the FTSE Environmental Markets index series.
Besides its 13-year track record, Simm attributes the growth of IAM’s institutional business to the support of the traditional pension fund gatekeepers. “We have been able to establish a good reputation with consultants and advisers,” says Simm. “This is important because consultants are increasingly dedicating teams to look at these areas and communicate the prospects to their clients.”
But he concedes that thematic or specialist equity investing is not for every institution. “Many institutions want their managers to pick the sectors and themes in response to shorter-term market conditions, whereas we consider ourselves to be a long-term investor,” he says. “In addition, the industry is known for its slow pace of change - in other words, mandates are not created frequently, which results in a relatively slow turnover.”
The asset manager holds between 0.5-4% of a company, depending on where the price is, relative to its intrinsic value. The average holding period is 4-5 years. The firm tends to trade companies around their target price.
IAM’s listed equity funds can have a 10-11% tracking error compared with the MSCI World index, which is why the asset manager needs to explain to investors that their investments may complement their other portfolio allocations that more closely follow a benchmark.
“Due to the relatively high tracking error, there are always going to be times when our strategies underperform the market although, hopefully, there will be more times when they outperform,” says Simm. “A dialogue with the respective investor usually proves the most successful.”
Currently, IAM’s invested assets are split 40% Europe, 35% North America and 25% Asia. But like most asset managers worldwide, IAM has increased its exposure to emerging markets, especially Asia, via its dedicated Asia fund, as well as through an office established in 2007 with two investment analysts in Hong Kong. But the company is unlikely to stop there.
“We are seeing Asia becoming increasingly important relative to Europe and North America,” says Simm. “Our investment process, which focuses on growth at a reasonable price, is to avoid them and, by and large, we avoided the solar bubble in 2007, as well as the biofuels bubble in 2006. One of the key attractions of our investment approach is our level of diversification, which reduces the risk of bubbles or specific tail events, and means that the volatility of our portfolio is similar to the one of the market.”
In order to reduce volatility, the bottom-up stock picker has, this year, increasingly moved into more defensive sectors such as water filtration and waste management, on top of putting more effort into factor risk analysis.
Simm believes that IAM’s clients like its focus and reputation on private and listed equity. He has not witnessed a trend among IAM’s investors of de-risking and moving out of environmental equity strategies.
“While there generally is a move away from equities to fixed income and alternatives, we do not see this trend reducing interest in environmental markets,” says Simm. “If anything. institutions are increasing their weightings, albeit maybe from a smaller pot. However, there is appetite for non-equity asset classes such as fixed income, hedge funds, real estate and even timber so we would be failing in our duties if we did not explore what we could offer in those areas.”
Many of IAM’s core clients are interested in timber. Simm calls it a fascinating opportunity, as it is large, fits well into IAM’s activities, is inefficiently priced outside the US, and structural evidence suggests that demand will grow rapidly.
But the asset manager has no definite plans yet to branch out into other asset classes, although it is already talking to some of its clients about what might happen in the future.