Analyse your stocks in seconds
Expert insights you can understand
Improve the odds of your stock picks
Generate investing ideas fast
Track & improve your Portfolio
Time your trades better with charts
Explore all the featuresStockopedia contains every insight, tool and resource you need to sort the super stocks from the falling stars.
One of the top performers in among listed UK asset managers in recent years has been sustainable investing specialist Impax Asset Management (LON:IPX) - shares in this founder-led AIM firm have tripled in five years, despite a calamitous 50% fall over the last 12 months:
One potential headwind for Impax is that ESG investing has come under pressure recently. I think this is due at least partly to a widespread lack of clarity about what it actually means.
According to HSBC’s former head of responsible investing, Stuart Kirk (who resigned last year after giving a colourful presentation entitled “Why investors need not worry about climate risk”) there are actually two types of ESG investing.
In an article in the FT (£) last week, Kirk explained that one type of ESG considers how environmental, social and governance inputs might affect future investment returns, and how companies are aiming to address such issues.
This approach lies behind the ESG rankings produced by major index providers such as MSCI and FTSE. The focus on inputs explains why companies such as oil and tobacco firms are often able to secure good ESG ratings.
The second type of ESG focuses on the outputs from the investment. This is what many people expect from ESG – sustainable assets. So a wind farm might be attractive, a new oil refinery less so.
Splitting ESG into inputs and outputs really makes sense to me. I would guess that most retail investors are thinking of ESG outputs when they choose to invest in sustainable funds.
Impax falls very much into the second type of ESG investing. Founded by CEO Ian Simm, who remains a shareholder, the company’s stated mission is to invest in “opportunities arising from the transition to a more sustainable economy”.
The top 10 holdings in Impax’s flagship Impax Environmental Markets (LON:IEM) fund appear to provide evidence of Impax’s clear focus on sustainability investments:
Source: Impax Environmental Markets July 2022 factsheet
Looking at the latest investor presentation from Impax, I see that the company’s strategies are divided into six categories:
Even before the pandemic, many of these sustainable asset classes didn’t look especially cheap to me. Covid-19 triggered a major surge in demand for ESG assets, pushing valuations even higher.
Some of this hot air has now been released. The value of Impax’s assets under management fell by 16% to £34.5bn during the first half of the year, almost entirely due to market movements.
Inflows have slowed, too. Net inflows for the first half of the year totalled just £275m. It looks like the breakneck growth seen over the last six years has just come screeching to a halt:
I’ve admired Impax’s clear purpose and its progress over the last few years. So I’m interested to see that the stock’s valuation has now fallen back to levels that are broadly in line with those seen in 2016 – around 15 times earnings, with a 3.5% yield.
Has this year’s sell off created a buying opportunity for investors who missed out on Impax the first time round?
Impax is currently rated as a falling star by Stockopedia’s algorithms:
In the Stockopedia style guide, a falling star is a stock with a high QualityRank, but low value and momentum scores. It can be costly to be on the wrong side of a falling star, as we can see from Impax’s share price chart above.
In general terms, the problem with investing in a situation like this is that there’s no catalyst for a higher share price. One positive factor alone is rarely enough; it’s the interplay between factors that creates the catalyst for gains.
However, companies with such strong quality metrics rarely look cheap in my experience, even during difficult periods.
Impax’s strong profitability and cash generation means that I’m inclined to take a more charitable view here than I might do elsewhere.
However, I do wonder to what extent Impax has simply benefited from being in the right place, at the right time. The company’s flagship IEM investment trust is benchmarked against the FTSE ET (environmental markets) index series. IEM has not convincingly outperformed the FTSE ET index over the last decade, in my view:
Source: Impax Environmental Markets July 22 factsheet
As an investment, Impax’s attraction seems to have been its ability to attract large investor inflows, rather than significantly outperform its benchmark. Group AUM has risen from £1bn in 2008 to nearly £35bn today.
I think the main question for investors is whether the company can continue to attract big new mandates in the future, in the face of tougher mainstream competition.
I’d guess that the company’s positioning as a sustainable investing specialist may help win new clients. Another possible attraction is that Impax does not seem to be a particularly expensive asset manager.
The latest accounts show an average fee margin of 0.47%. This puts Impax at the bottom end of the range of mid-sized UK asset managers I surveyed:
Company | Average revenue margin |
Polar Capital Holdings (LON:POLR) | 0.83% |
Jupiter Fund Management (LON:JUP) | 0.74% |
Premier Miton (LON:PMI) | 0.65% |
Liontrust Asset Management (LON:LIO) | 0.63% |
Impax Asset Management (LON:IPX) | 0.47% |
Ashmore (LON:ASHM) | 0.39% |
How bad will things get for Impax before market conditions stabilise? To get an idea of what might happen, I’ve modelled three possible scenarios.
Best case: 20% fall in AUM from Dec 2021 + flat net flows
Mid case: 25% fall in AUM from Dec 2021 + 10% net outflows
Severe case: 35% fall in AUM from Dec 2021 + 20% net outflows
Note: these are simplistic estimates that assume profit margins will stay in line with FY21. That might not be possible – I’m not sure how Impax’s costs would vary with falling AUM.
My estimates price Impax on stock on between 18 and 28 times forecast earnings. In the mid- and best-case scenarios, I think the current dividend would probably remain within Impax’s policy of paying out 55%-80% of adjusted net earnings. So a cut shouldn’t be necessary.
One other point worth making is that all of my estimates are below current broker forecasts. So perhaps I’m being too cautious:
Impax Asset Management’s financial year ends on 30 September. I plan to wait for the company’s next update to get a more recent view on performance and the possible outlook for the business.
However, for investors who want concentrated exposure to ESG outputs, I think Impax and its funds are probably worthy of further research.
About Roland Head
I'm an investment writer and analyst, with a particular focus on systematic investing and dividends. I look for quality stocks with above-average returns, strong cash generation, and attractive valuations - always with dividends.
In my earlier life, I worked as an systems engineer in telecoms and IT. The quantitative, rules-based approach required for this kind of work suits me and has certainly influenced my investing style. I also learned a lot from seeing the tech bubble deflate in 2000/1, when I was working for a large and now defunct telecoms group.
Disclaimer - This is not financial advice. Our content is intended to be used and must be used for information and education purposes only. Please read our disclaimer and terms and conditions to understand our obligations.
Bouden54. Agreed.
Re Impax Asset Management (LON:IPX), another short to medium term negative is that on the crest of the wave at the turn of the year, they had invested in a significantly larger work force to build on their programe - which has since fallen back - and |I imagine these guys aren't cheap!
Thanks for this article Roland. FYI, Impax publish their AuM monthly on their website https://impaxam.com/investor-r... At the end of July AuM had risen to £38.2bn - the August update should come through this week.
Thanks for highlighting this, Brilliant Leader.
I'd noticed that a basket of the largest holdings had recovered somewhat over the summer, but I hadn't seen the August AUM update.
Regards,
Roland
Interesting article. Thanks.
Impax has probably been my best ever equity investment (despite an enormous pull-back) having bought lots at the c50p level. I never dreamed it would do as well as it has. I have top-sliced a few times, but continue to hold a chunk long-term. Ian Simms is a great leader in this space and they have competitive advantage having one of the longest track records in ESG. Still optimistic that they will continue to do very well long-term, but think the next year will continue to be choppy.
I also hold Gresham House and Foresight Group. They are much better on physical assets in this space and have very sticky revenues.
One shortcoming that Impax has is in its physical assets fund which is very sub-optimal versus the equity side of the business. An obvious way forward for Impax would be to buy something like a smaller scale Gresham House or Foresight. It won't be either I feel, as they both have strong leadership teams, but there may be other alternative asset providers of a smaller scale with a couple of billion AUM which would triple the size of their business in this area. It's definitely an obvious strategic move for them at this stage.
*Past performance is no indicator of future performance. Performance returns are based on hypothetical scenarios and do not represent an actual investment.
This site cannot substitute for professional investment advice or independent factual verification. To use Stockopedia, you must accept our Terms of Use, Privacy and Disclaimer & FSG. All services are provided by Stockopedia Ltd, United Kingdom (company number 06367267). For Australian users: Stockopedia Ltd, ABN 39 757 874 670 is a Corporate Authorised Representative of Daylight Financial Group Pty Ltd ABN 77 633 984 773, AFSL 521404.
I follow the fund management sector closely and think there are much better plays for those wanting exposure to sustainable investments (which is likely to remain a big theme and attract lots of inflows).
Impax invest mainly in public equities and are therefore very susceptible to both market falls and investor outflows. I also question how much of an edge they really have - pretty much every fund manager now has a range of sustainable equity funds. Not to mention dozens of passive sustainable ETFs with much lower fees. Are the Impax funds really any better than these?
The 2 I prefer (and hold) are Gresham House (LON:GHE) and Foresight group (LON:FSG) - these mainly invest in private assets (such as forestry, energy storage or solar) for institutional clients. Importantly, the aseets are largely uncorrelated to wider market movements, while clients tend to be locked in for longer periods.