The decision to avoid Tesla was responsible for the Impax Environmental Markets trust’s underperformance in the first half of 2020 compared to the FTSE ET100, according to its managers.
But they said remain steadfast in its decision that the trust will not invest in the electric car giant.
During the March coronavirus sell-off, the Impax Environmental Markets trust was hit hard by the weakness of small- and mid-cap companies in this period, according to manager Jon Forster.
“The performance in the crisis, [the trust] didn’t do what I’d hoped it would do, but the performance of small- and mid-caps was so weak broadly that I think there was only so much you could do,” he said.
This, he said, was responsible for the trust’s underperformance versus its MSCI ACWI benchmark.
But the underperformance against the FTSE ET100 index was overwhelmingly caused by the team’s decision not to invest in Tesla. The FTSE ET100 index is the trust’s environmental markets benchmark, while its performance benchmark is the MSCI ACWI index.
In the half-yearly report, the managers said: “[The trust] significantly underperformed its environmental comparator, the FTSE Environmental Technologies 100 (FTSE ET100), which rose 18.5 per cent over the period; once again, not owning this index’s largest constituent, Tesla, accounts for 13 per cent of the 20 per cent underperformance.”
Performance of trust versus benchmark, sector and FTSE ET100 index during H1
Source: FE Analytics
Elon Musk’s Tesla is the largest company in the FTSE ET100, making up 11 per cent of the index.
Coming through as one of the major winners this year, the renewable energy car company has moved from a niche manufacturer into the mainstream as renewable energy cemented its place as a major investment trend.
In 2020 so far, Tesla’s market share price has increased by 400.86 per cent.
Tesla share price YTD
Source: FE Analytics
But Forster said that he chooses not to invest in Tesla for three key reasons.
The first is valuation. “We always struggled to get comfortable with the valuation of the business,” Forster (pictured) said.
Along with a number of US tech stocks, Tesla has faced criticism over the extremely rapid rise in its share price, with some investors questioning if it is overstretched or unsustainable. 
Second “is a question of ESG [environmental, social, governance]”, the manager said.
“We do our own analysis and Tesla fares very poorly, particularly on areas like governance: look at the dominance of Elon Musk on board structures etc, but also on environmental and social issues.”
Musk is currently the largest shareholder in Tesla, holding around 21 per cent of the company’s shares.
Even though Musk was stripped of his CEO title as part of his Securities and Exchange Commission fine in 2018 – after he was accused of misleading investors via Twitter about making Tesla a private company – he still retains a majority vote of the board. A change in governance has not yet been implemented
The Impax Environmental Markets manager said: “It’s one of the very small number of businesses which we’ve excluded from investment on the back of its E, S and G credentials.”
And finally Forster said that the trust prefers to invest across the renewable energy category rather than just in one name. Choosing to invest in the component suppliers and materials would give a “broader exposure to the growth of electric vehicles” at a cheaper valuation.
The manager added that the renewable energy theme is one he was looking to expand into more, given all the “accelerating trends” towards sustainability that markets and general society has seen this year.
The Impax Environmental Markets trust invests in companies which help to deliver more basic services such as energy, water and waste more efficiently.
Forster doesn’t argue with the fact that the Tesla brand is strong, since very few electric car companies haven’t been able to compete. But it is one company he said the trust won’t hold.
But while not holding Tesla may have hurt the Impax Environmental Markets trust during H1, the trust has recovered some of its performance without it.
Year-to-date, the trust has made a total return of 5.85 per cent, outperforming both its performance benchmark and sector. The FTSE ET100 has continued to climb, still closely linked to Tesla’s performance.
Performance of trust versus benchmark, sector and FTSE ET100 index YTD
Source: FE Analytics
Forster said that the trust’s performance had been “pretty solid and pretty strong” since coming out the other side of the coronavirus crash in March.
So how did a trust, whose performance was dragged down from not owning Tesla, manage to outperform without it months later?
Part of this was down to new allocations made during the March-April downturn period, according to Forster.
Over the past few years ,the manager has put a lot of effort into diversifying the trust’s cyclical exposure and looking for more “defensive business models to provide a solid footing for the trust”.
This idea of moving into more defensive, crisis-ready options and reviewing the trust’s current holdings, meant that the companies they held “could navigate these exceptionally challenging times”.
“But we’re very pleased with what we own, we’re pleased with the opportunities that we found in the very volatile markets,” Forster added.
One of these new names was Taiwan-listed bike manufacturer Giant Bicycles.
Forster explained that the company not only had a “solid market share” but a strong position in the long-term e-bike theme.
Other themes the company tapped into were ageing populations as well peoples’ increased desires to remain active and, during the current pandemic, avoid public transport. These short- and long-term themes made it an attractive investment, according to Forster.
“The weakness of markets in March-April gave us the opportunity to get a position,” he said.
Another new holding was US company Repligen, which produce materials used in drug manufacturing processes.
In the half-yearly report, Impax Environmental Markets managers said the company offers “defensive characteristics and a lower environmental footprint compared to baseline technology”.
Using a lot less water, chemicals and energy compared to the current standard, Repligen not only performs well from an environmental point of view, but the company itself “has strong growth and also less cyclical markets which it’s selling into”.
Discussing his outlook, Forster said it was still very uncertain in general due to questions about the longevity of the coronavirus.
“But we are choosing to focus on the long term,” he concluded.
“We feel that the outlook for environmental markets is very strong and coming out the other side of Covid-19 and in this new global constellation we feel that we’re in the right place for the long-term and we’re happy with our balance and shape of the portfolio, and the performance that it’s delivering.”