Uncertainty about the direction of interest rates, inflation and the economy has been disturbing for financial markets in general, but more so for the highly specialized, mid-to-small capitalization companies that populate the portfolio of Desjardins SocieTerra Cleantech.
The long term has been good for the four-star fund, ranked silver by Morningstar. The F Series (also available in Series D) shows a top quartile five-year average annual compounded gain of 7.3%, more than double the comparable 3.7% return shown by Morningstar’s Global Small/Mid Cap Equity Category and well ahead of the index return of 6.5%. But recent times have been volatile on the downside, and after dropping 18% in 2022, the fund suffered a year-to-date decline at Oct. 31, 2023 of 8.7%.
Sponsored by Montreal-based Desjardins Wealth Management, the fund is subadvised by London-based Impax Asset Management Group PLC, which focuses on sustainable and responsible investment strategies.
Environmental Sector Headwinds are Temporary
“It’s been a challenging period, but the portfolio has been rerated substantially and is looking attractive in terms of potential upside,” says Fotis Chatzimichalakis, portfolio manager at Impax and a member of the fund’s management team. “Environmental markets have been facing headwinds, but it’s temporary, and a good time for long-term opportunities.”
Chatzimichalakis says the market is still digesting the idea of “higher interest rates for longer” and the possibility of a shallow recession still lurks. There’s been some gravitation to larger established companies and a “value” tilt, which has hurt the growth-oriented companies in the SocieTerra Cleantech portfolio that tend to be more sensitive to interest rates. The escalation in geopolitical concerns in the Middle East and other parts of the world has also had an effect.
“We’re in a world where environmental investing may not currently be a top priority for governments, but it’s a temporary phenomenon and doesn’t change the longer term drivers,” Chatzimichalakis says.
Investing in What’s Best for the Environment
The fund’s investment universe is made up of “pure play” firms that derive at least 50% of their revenue from businesses that target environmental sustainability. Holdings are focused on such areas as energy efficiency, clean transportation, water treatment and conservation, waste management and sustainable food production and agriculture. Although nuclear power is considered to be lower-carbon, it is not part of the fund’s mandate due to waste management challenges, Chatzimichalakis says.
“It’s about resource efficiency, and how things can be done in a better way,” says Chatzimichalakis. “The focus is on a circular economy that prioritizes recycling, rather than a linear system.”
Typically, the portfolio contains 55 to 65 companies around the globe, and may have up to 20% of assets in emerging markets. The majority of companies have a market capitalization of between US$5 billion and US$20 billion, but about 30% would be smaller than US$5 billion. The typical weighting of any one company in the fund is between 1% and 3%. Recent annual turnover was 37%, according to Morningstar, but several names are stalwarts that have been in the portfolio for more than five years.
International Clean Tech Investments
Emerging market investments include Dabur Ltd. DABUR, an Indian multinational consumer goods company that produces personal care products, food products and Ayurvedic medicines from natural ingredients; Shenzhen Inovance Technology Co. Ltd. 300124, a Chinese industrial automation firm; Xinyi Solar Glass Ltd., a Hong Kong-based global leader in solar photovoltaic glass; and Sabesp, a state-controlled Brazilian water and waste management utility that is taking steps toward privatization.
“It’s a dynamic and evolving opportunity set,” Chatzimichalakis says. “In the late 90’s there were about 250 investable companies, now there’s about 1,300 and new opportunities are coming up.”
The fund’s largest holding is PTC Inc. PTC (formerly Parametric Technology Corporation), a U.S.-based software company focusing on industrial design. The company retains its clients by providing “life cycle management” through constant online monitoring, maintenance and updating of its software products.
Top Clean Tech Stock Picks
Also in the top 10 holdings are Stericycle Inc. SRCL, a U.S.-based medical waste management firm, and Clean Harbors Inc., a U.S.-based firm focusing on management of industrial hazardous waste. In addition, Desjardins SocieTerra Cleantech holds Bucher Industries AG OQQN, a Swiss firm that makes machinery, vehicles, hydraulic components, and manufacturing equipment for use in harvesting, food producing and packaging on a global basis, as well as roads and public space cleaning. Its agricultural machinery is geared to increase productivity on farms and reduce the use of resources such as fertilizer and water.
“We analyze things like governance, sustainability risk, disclosures and the character of a company,” Chatzimichalakis says. “We establish contact with management teams and cultivate a relationship for a while before we invest.”
Chatzimichalakis says attending conferences is useful for gathering information due to the opportunity to meet the people who sell the products and run various arms of companies, not just the top executives.
With recession a risk and continuing uncertainty over the direction of interest rates and inflation, the Impax team is steering away from cyclically sensitive companies and focusing on those with resilient business models and balance sheet strength, Chatzimichalakis says.
Recent additions to the portfolio include Steris PLC STE, an Irish-domiciled medical equipment company specializing in sterilization and surgical products for the US healthcare system, and Prysmian Group S.p.A., PRY an Italian infrastructure firm involved in the production of cable solutions for expansion and modernization of the electrical grid as well as optical fibres for the telecom sector.
