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The Pax GEM Team: Mining the Green Market for Hidden Jewels

The Pax World Global Environmental Fund took a step back from renewable energy — and in turn renewed the vitality of its portfolio.

After a break of several years, the Pax World Global Environmental Markets (GEM) Fund has begun buying renewable-energy stocks again.

It may seem counterintuitive that a global clean-technologies fund would avoid the sector synonymous with its mandate. But the portfolio managers who run the fund — Hubert Aarts, Simon Gottelier and Bruce Jenkyn-Jones of London-based Impax Asset Management, a subadviser to Pax World Management — recognized a bubble when they saw one. They largely steered clear of renewables, and when the solar market began to unravel, resulting in scores of bankruptcies and closures between 2009 and 2013, they avoided the poor returns that plagued many environmentally focused stock funds during that time.

Thanks to such foresight, the fund now boasts a five-year annualized return of 14.09 percent for its institutional class, just under that of the MSCI World Index, which includes a broadly based collection of stocks from developed countries. The one-year and three-year returns for the institutional class, at 24.99 percent and 11.9 percent, respectively, edged out the benchmark.

Pax GEM, one of seven sustainable strategies offered by Pax World, a Portsmouth, New Hampshire–based fund management firm that focuses on sustainability and environmental, social and governance (ESG) investing, comprises both growth and value stocks of any market capitalization, at least 40 percent of which are non-U.S. companies, including some located in emerging markets. Now that the renewables sector appears to be turning around, the fund is hunting for buying opportunities in that area, most recently adding Trina Solar, a Chinese manufacturer of photovoltaic modules.

“We like to invest in markets that offer strong returns, good margins and stable and visible growth prospects,” says Jenkyn-Jones, head of listed equities at Impax. “We think that given the strong growth prospects in global markets, rather than just a couple of isolated subsidized markets, [renewables] look quite attractive at the moment. So, for the first time in a number of years, we’ve been increasing our exposure.”

The key that allows the fund to pull back in a single poorly performing sector is simple: a diverse portfolio. To pass Pax GEM’s investment muster, a company must have 20 percent of its revenue or invested capital coming from one of the resource optimization industries on which the fund concentrates — energy efficiency, pollution control, water resource and waste management, and sustainable food and agriculture, as well as renewables. The fund’s broad due diligence process includes a ten-step analysis that takes into account common investment criteria such as a company’s position in its market, stock catalysts and stock risks, particularly in governance considerations around issues like board composition.

The GEM team also tries to identify whether a company has technological advantages over its peers. For example, within the automotive industry they look for companies like Delphi Automotive and BorgWarner, both based in Michigan, that supply advanced technology for improving transmission drive trains and reducing emissions, playing into the cyclical recovery and tightening regulations.

“When we make investments in businesses such as Delphi or BorgWarner, we’re investing in fuel efficiency and emission reduction technology that finds its way onto many millions of cars, as opposed to technology that’s embedded within a few thousand cars,” Gottelier says. “So we’re trying to capture a broader, global mass-market volume effect — although that is tinged with a degree of envy because we haven’t owned Tesla for the last couple of years.” (The GEM team views the Palo Alto, California–based electric-car maker as substantially overvalued.)

In the water resource and waste management sector, which is Gottelier’s area of expertise, the fund has profited from the rebound in residential construction in the U.S. and expects to see ongoing benefit coming from a recovery in commercial construction. North Andover, Massachusetts–based Watts Water Technologies, which provides plumbing infrastructure, is one of the fund’s top ten holdings. Other favorites of the moment include Sweden’s NIBE Industrier, an international heating technology company, and Ozner Water, one of China’s largest water purification suppliers.

The GEM team has been together since the fund’s 2008 inception, and there is an interdisciplinary mix — a diverse portfolio, if you will — within the team itself. In addition to the three managers, 12 analysts work on the fund.

Lead portfolio manager Aarts comes from a mainstream investment management background, having earned an MBA from Maastricht University in the Netherlands and previously worked at Merrill Lynch Investment Managers and Cambrian Capital Partners. Gottelier, who is the lead analyst on water stocks, joined Impax from Veolia Environnement, where he was a financial analyst covering the U.K. regulated water industry. He previously worked for NM Rothschild & Sons and Deutsche Bank, where he provided strategic, M&A and financing advice to European and U.S. clients across a wide range of industrial subsectors. His degree is in modern languages, from the University of Bristol in the U.K.

Says Gottelier, “For me, a lot of the skills involved in a humanities degree are surprisingly pertinent in financial analysis: mainly, analyzing very large amounts of data and pulling out the things that are important.”

Jenkyn-Jones, on the other hand, started out in the hard sciences, majoring in chemistry as an undergraduate at the University of Oxford and going on to complete a master’s in environmental technology from Imperial College London. He later completed his MBA from IESE Business School in Barcelona. “I saw a lot of opportunity in the environmental markets,” he says. “And I was conscious that, for it to occur, it would require a lot of financial investment.”

According to Jenkyn-Jones, for institutional investors the question of where the portfolio fits into their investments can be answered in a few different ways. It serves as a global equities strategy, a diversification to resources exposure and an ESG mandate.

“Given how global markets are evolving, with the focus on resource efficiency and mitigating environmental impact along with the regulatory, technology and mergers and acquisitions drivers, we should be able to deliver superior returns because those markets are growing faster than the global economy,” Jenkyn-Jones says. “In fact, the ESG work that we do really helps us identify better companies.”

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