Morning Note: Market news and an update on the Impax Environmental Markets Fund.

Market News

Gold prices climbed above $3,800 an ounce for the first time ever on Monday, driven by a weaker dollar and growing expectations of further US rate cuts. Data showed on Friday the US PCE inflation data came in line with expectations, reinforcing bets that the Federal Reserve could continue easing policy later this year. 

This coming week there is a raft of US economic releases, including job openings, private payrolls, the ISM manufacturing PMI, and the non-farm payrolls report, all of which will provide more clues on the economy’s health. Traders are also monitoring the risk of a potential US government shutdown.

US equities ended last week on a positive note – S&P 500 (+0.6%); Nasdaq (+0.4%). The Treasury yield curve steepened mildly in quiet conditions – the 10-year yields 4.15%. In Asia this morning, equities were generally firmer: Hang Seng (1.9%); Shanghai Composite (0.9%). The exception was Japan (Nikkei 225, -0.7%) which fell as ex-dividend stocks weighed on the benchmarks. Bloomberg believes China is shedding its ‘uninvestable’ tag and attracting global money managers concerned about missing out on its world-beating stock rally.

The FTSE 100 is currently 0.5% higher at 9,329. AstraZeneca plans to harmonise its share listing structure – this requires a direct listing of the shares on the NYSE in place of existing US ADRs. However, the company will continue to be listed, headquartered, and tax resident in the UK. Sterling trades at $1.3445 and €1.1460.

Brent Crude slipped back below $69 a barrel as traders bet on a boost in output, with people familiar saying OPEC+ may raise November supply by more than next month’s scheduled 137,000-barrel-a-day increase.

Source: Bloomberg

Fund Update

Impax Environmental Markets (IEM) is an £850m London-listed investment trust that invests globally in companies active in the growing resource efficiency and environmental markets. The managers are the highly respected Bruce Jenkins Jones, Jon Forster, and Fotis Chatzimichalakis. The ongoing charge is a reasonable 0.89%.

The fund is founded on the belief that, with insatiable demand for higher living standards on a finite planet, companies enabling the cleaner and more efficient delivery of basic needs – such as power, water and food – or mitigating environmental risks like pollution and climate change, will grow earnings faster than the global economy over the long-term.

The fund is well placed to exploit themes including resource scarcity exacerbated by expanding global population, replacement of ageing infrastructure, demand for new infrastructure driven by urbanisation, energy security, climate change, and environmental pollution. In particular, the manager highlights the transition away from internal combustion engines towards hybrid and electric vehicles, the global push to reduce plastic waste and the move away from single-use plastics, and the drive towards more efficient use of resources.

The manager uses a proprietary classification system to define six higher growth markets: Energy, Clean and Efficient Transport, Water, Circular Economy, Smart Environment, and Sustainable Food. To qualify for IEM’s investable universe, a company must derive at least 50% of its revenue from these markets. As a result, IEM’s investments are predominantly in small and medium-sized companies, which tend to focus their business models on fewer activities. The (predominantly quoted) companies provide, utilise, implement or advise upon technology-based systems, products or services in environmental markets, particularly those of alternative energy and energy efficiency, water treatment and pollution control and waste technology and resource management (which includes sustainable food, agriculture and forestry).

After a period of strong performance in the three years to the end of 2021, the fund has struggled over the past three years, pulling the longer-term returns down.

Higher interest rates have been unhelpful for sustainable stocks which are typically growth companies that have valuations based on the future profits. The fund has also been impacted by an investor preference for mega-cap tech stocks at the expense of small and mid-cap stocks to which the fund is biased. The lack of exposure to areas such as AI and defence have also held back returns.

The sector has also faced political headwinds. The US has once again withdrawn from the Paris Agreement, while President Trump has pushed for increased spend on hydrocarbons at the expense of funding for electric vehicles and offshore wind developments. However, there is an increased focus on improved supply chains, cost competitiveness, and secure energy distribution infrastructure. In the UK, the green agenda has also somewhat shifted, with companies such as BP retreating from its renewable energy ambitions. However, the Bank of England has highlighted the growing threat climate change represents to economic stability.

IEM’s direct exposure to companies with significant tariff impacts is limited and, those which are, typically have the pricing power to pass on costs.

The story so far in 2025 has been one of ongoing uncertainty, generating headwinds for the small- and mid-cap companies in which the fund invests. In the year to 29 August, the NAV per share has risen by 3.5%, helped in part by the reduced share count (see below). The share price is up 4.4%, ahead of the FTSE ET Index (a more concentrated index focused on environmental markets, -2.9%) but behind the broader MSCI All Country World Index (ACWI, +6.0%). However, the manager highlights that the underlying earnings of the portfolio companies remains robust with excellent prospects for growth.

We note the company is currently in the process of agreeing a benchmark index that will be more representative of the environmental markets opportunity set and against which the manager’s performance can be assessed and understood.

As at 29 August, the portfolio breakdown was: energy management & efficiency (29%), resource efficiency & waste management (20%), digital infrastructure (20%), water infrastructure & technologies (19%), alternative energy (9%), sustainable food and agriculture (5%), environmental resources and services (3%), and transport solutions (3%). By geography, the fund is split across North America (58%), Europe (34%), and Asia Pacific (14%).

There were 54 holdings – the usual range is 55-65 – a marked reduction from earlier in the year. There has been a higher level of stock turnover of late, reflecting a concerted effort to consolidate the fund into a more focused portfolio of high quality and high conviction holdings. Positions have been built in companies offering, on one hand, resilient business models and, on the other, highly visible structural growth. By contrast, sales have targeted stocks with less certain upside and limited influence over their own destinies.

The top 10 stocks account for 28% NAV, with the largest current holdings Synopsis (efficient IT); Air Liquide (industrial gas and energy efficiency); Waste Connections (general waste management); Xylem (water distribution and infrastructure); and Trimble (efficient IT).

IEM has seen a pick-up in M&A as market participants acknowledge the disconnect between holdings’ long-term growth prospects and their low valuations. The bid for Azek marks the fourth in the portfolio in less than twelve months.

The dividend policy is to pay out substantially all earnings by way of dividends, the quantum of which is affected both by the level of dividends received by the company and by the number of shares in issue. The first interim dividend for 2025 was 1.8p, up 6%. A similar rate of growth at the full-year stage would generate a yield of 1.4%.

A modest level of gearing is used – up to 10%. In a bid to avoid over-burdening its fund managers with too much cash, the board has already restricted the amount of borrowing it uses to gear up investment returns. However, the de-rating of the portfolio compared with wider equity markets creates a compelling valuation and, for this reason, the fund has increased its gearing. As at 29 August 2025, it was 8.65% with average borrowing maturity around 4.5 years with a mix of fixed (40%) and floating (60%) debt.

As an investment trust, the shares trade at a premium or discount to NAV. Although they traded at a premium between 2019 and 2021, for much of the time before and since, they traded on a discount, sometimes as high as 20%. The discount is currently around 10%. In response, since 2022 the board has been buying back shares at a steady rate, with 32.3m repurchased so far this year (17.6% of the issued share capital). All buybacks are accretive to the company – by 1.8% so far this year.

Source: Bloomberg