Portfolio Manager Interview

Interview with Pax World Global Green Fund sub-advisor Impax Group PLC

Can you tell us about Impax Group’s investing philosophy?
We invest in companies that are at the forefront of developing products and services to address some of the world’s most pressing environmental problems.  In particular, we use our understanding of the environmental sector and its regulatory surroundings to exploit investment opportunities as we seek to deliver competitive returns for our clients.

Why were you interested in partnering with Pax World for the management of its Global Green Fund?
Impax has a track record of partnering with prominent fund managers around the world. In fact, we’ve found this model to be the most attractive way for us to offer a product in a new market such as the US market.  We are delighted to have the opportunity to partner with Pax World, which has one of the strongest brands in the Sustainable Investing sector.

Can you share a little with us about the investment strategy you will employ to manage the Fund?
The Global Green Fund is an all-cap fund investing in companies whose businesses and technologies focus on goods and services that address the world’s most critical environmental problems. Those would include such areas as alternative energy and energy efficiency, water treatment and pollution control and waste technology and resource management.  Because, the Fund is not restricted by any investment style, we have the added advantage of being able to invest in growth or value companies or a combination of both.

Traditionally, growth in environmental markets has been dominated by small companies.  However, owing to government policies designed to address global warming issues and associated legislative changes, as well as falling costs of technology, we believe that mid-sized and larger companies, or their specialist subsidiaries, are increasingly important developers, manufacturers or operators of products and services that directly contribute to a low carbon economy.  As such, we believe that an unrestricted portfolio with a range of market capitalizations is well positioned to outperform traditional indices over the medium- to long-term.  We apply a bottom-up, research-intensive investment process to identify lesser known, undervalued companies in line with a GARP (Growth At Reasonable Price) approach.

Let’s talk about stock price. How does your team decide what the right price is to pay for a particular security?
We look at the company’s expected earnings, cash flows, cost of capital and risk to try and identify the intrinsic value of a stock according to the GARP principle.

Perhaps you can give us a few examples of the types of companies that you might consider as investment options for the Fund?
Three come to mind immediately.

ThermoFisher (2.7% of Global Green Fund*) is a world market leader in testing and instrumentation products.  Its environmental revenues total $450 million, with growing exposure to radiation measurement, air quality data collection and water quality testing.  It’s a more than $8 billion market growing at 7% annual rate – with significantly higher growth in BRIC countries (Brazil, Russia, India, China).  Yet in our view, the market continues to view the company as a laboratory equipment and science company. That spells real opportunity in our minds.

Second is Acciona (0% of Global Green Fund*)  – one of the world’s largest wind power companies.  Renewable Energy represents approximately 75% of the total business, and it’s growing 20% annually.  Acciona’s purchase of shares in the Spanish utility Endesa underpins a very successful renewable energy franchise.  We believe that the company’s transformation has been underappreciated by the market, and an upward re-rating looks set to continue driven by renewables and the performance of Endesa.

Finally, Linde (1.9% of Global Green Fund*) has 21% of the global gases market and is one of the two leaders in Europe. Its takeover of BOC has strengthened its geographical position.  Environmental concerns (cleaner fuels, lower emissions from industrial processes) will be key drivers of demand for the next 5 years.  The company expects to grow this activity by 8%-10% in the coming few years, providing further scope for its stock price to appreciate.

*Portfolio holdings are as of 3/31/08.

What are some of the challenges of managing a global green fund?
Understanding the regulatory issues and complex technologies, keeping up with the constant changes in a rapidly growing market, comparing opportunities around the world and looking for evidence of mis-pricings are among some of the challenges of managing a global green fund.

In addition to investing in companies with positive environmental performance, the Pax World Global Green Fund seeks out companies whose goods and services help others improve their environmental performance. Can you speak to that concept?
Yes, this is very much in line with our investment philosophy.  Because we invest in companies providing clean services, infrastructure and technology in the energy, water and waste sectors, all of our investee companies are of benefit to the environment.  We should stress, however, that we are not investing in companies from other sectors (e.g. automotives or retailers) that have a positive environmental performance relative to their peers.  But you would be right in saying that our companies provide goods and services that help companies in the wider economy to improve their environmental performance.  For example, Emerson Electric sells energy efficient power conversion and distribution equipment to US utilities. In addition, the Irish company Kingspan sells insulation materials to construction companies for improved energy efficiency.  Chloride Group provides uninterruptible power supply products to retailers with energy critical applications (as well as to many other industries), while the Japanese company Stanley Electric sells energy efficient LED automotive lighting modules to Japanese automotive manufacturers.

Do you try to meet face-to-face with the management teams of many of the companies you are interested in investing in?
Yes, indeed. This gives us the opportunity to question companies on their operations in order to assess their viability.  We believe Impax investment team’s strong science and engineering background give us an edge in carrying out this part of our fundamental analysis.

What will differentiate the Fund from the other environmental funds available in the marketplace?
This Fund will be sub-advised by one of the leading specialist environmental fund managers in the world.  Our team has been together for almost a decade, which is highly unusual in this sector, and is able to enhance its stock picking process based on our experience in private equity and infrastructure investing.

In short, we believe we are particularly well suited to run a Fund as unique as this one.

Thank you for your comments. It’s been very interesting.