When it comes to assessing the exposure of NEI Environmental Leaders' portfolio to various industries, the fund's allocation to traditional stock market sectors such as industrials, technology or healthcare fails to provide a true blueprint.
A clearer picture emerges by viewing how holdings are divided among various companies offering solutions for resource optimization and sustainability in four crucial areas: energy, water, food/agriculture and waste management.
People will soon be demanding more resources to power the global economy than the planet can supply, says David Richardson, New York-based executive director of Impax Investment Management, the London-based subadvisor to the fund. In addition to the limited supply of resources essential to life, climate change and pollution are key challenges.
"We invest in companies providing products and services that will result in less resource depletion and a more sustainable economy, focusing on those with better growth potential than broad global markets," Richardson says.
Currently, the lion's share of the fund, or 40% of assets, is invested in companies involved in clean water infrastructure, followed by companies tied to clean energy/energy efficiency (36%), sustainable food/agriculture (15%), and waste management/resource recovery (9%). The portfolio is void of any fossil fuel investments.
About 97% of the world's water is currently estimated to be undrinkable, presenting vast opportunity in water infrastructure and treatment, as well as pollution control.
A key portfolio holding in the water segment is 
Ecolab (ECL), a U.S.-based provider of water treatment technologies and sanitizing processes for the food, energy, healthcare, industrial and hospitality markets.
Other large water-related holdings are Suez SA, a French water utility and one of the world's foremost builders of water desalination plants; Ferguson PLC (FERGY), a UK supplier of building materials and equipment for water infrastructure projects; and Danaher (DHR), a U.S.-based diversified conglomerate that makes equipment for water treatment plants.
There is growing evidence that the depletion of resources such as clean water, clean air and arable land will soon restrict global economic growth, Richardson says. For example, for every 1% increase in its economic growth rate, China's need for clean water is increasing at the same rate.
"China reached peak clean water a while ago," Richardson says. "There are investment opportunities in systems to provide clean water for crops and for drinking."
He says the best investment opportunities generally tend be in companies that make equipment such as pumps, pipes and filters, rather than in the organizations (usually government-run) that control and move water. He views investments in the water industry as highly "defensive" and expects demand for equipment and services used in the provision of clean water will continue even if the global economy slows.
Richardson says one of the stronger performers in the fund recently has been Xylem (XYL), an equipment and service provider for water and wastewater applications. Its products include pumps and valves, and equipment for water treatment, testing and transportation.
Based in the U.S., the company does a considerable amount of business in Asia, including China. Richardson says it has been able to maintain strong growth momentum for its water infrastructure solutions despite potential headwinds arising from trade disputes between China and the U.S. It has also demonstrated pricing power and the ability to grow profits as the business expands globally.
Top fund holdings tied to the sustainable energy theme, the second largest category in NEI Environmental Leaders, include Siemens (SIEGY) of Germany, a diversified industrial manufacturing company and technology pioneer, as well as TE Connectivity (TEL), of Switzerland, which makes connectivity and sensor products. With the prices for limited energy resources likely to increase, there is value in companies that help conserve energy or reduce demand for it, Richardson says.
Tied closely to this theme are investments in the electrification of transportation, he says. But rather than owning manufacturers of electric cars such as Tesla (TSLA), the fund focuses on companies that make the equipment that goes into electrically powered vehicles including software, sensors and wire.
"It's similar to the strategy of profiting from selling picks and shovels to gold miners, rather than trying to find the gold," Richardson says.
Other holdings tied to the energy theme include Aptiv PLC (APTV), a global auto parts company developing self-driving cars, and passenger train company East Japan Railway.
While food/agriculture is a smaller share of the fund, this sector contains the fund's top holding. Called Sealed Air (SEE), it is a diversified packaging company that addresses growing customer preferences for fresh and healthy food. Among other products, the company makes a vapour membrane wrapping for food that lets oxygen in and carbon dioxide out, and helps products stay fresh and flavourful.
Also in the food/agriculture sector, the Impax team took advantage of market weakness in the third quarter to purchase more stock in Trimble (TRMB), a pioneer in GPS data collection with applications for sustainable agriculture, irrigation and engineering.
Turnover tends to be low in the fund, which has an average holding period of five years for its companies. However, in recent months the fund sold a couple of holdings.
For example, the team took advantage of price movements presented by market volatility to sell BorgWarner (BWA), a manufacturer of components and parts for cars, including the electronic vehicle market. Instead, it bought Delphi Technologies (DLPH), an automobile component manufacturer with a more compelling growth story, Richardson says.
Another discard from the portfolio was Severn Trent PLC, a fresh water supplier and sewage treatment company sold due to concerns about the nationalization of water utilities in the United Kingdom.
To qualify for inclusion in NEI Environmental Leaders, companies must derive 20% or more of their revenue from Impax's defined sustainability themes.
As environmental issues become more urgent, there has been a dramatic increase in the number of eligible stocks in the fund's global investment universe in recent years, Richardson says, with the list of potential investments doubling since 2012 to more than 2,000 companies. The fund limits its portfolio to about 50 holdings.
