Tell us about your Large Cap strategy and how you stand out among peers?
Andrew Braun: Every investment strategy at Impax is guided by the same shared philosophy. We believe that the economy is in transition from a depletive economic model to a more sustainable model. Our focus on this transition to a more sustainable economy guides the Impax Large Cap Fund to be forward-thinking in our approach to industry and stock selection.
Barbara Browning: Our large-cap core equity portfolio fully integrates sustainability in each step of our investment process, and it's done in a manner that incorporates robust valuation parameters. This enables us to be flexible in our approach and capture opportunities for both growth and value stocks, while remaining firmly in the core style box.
AB: The typical large-cap sustainable fund often tilts towards growth and that’s a large point of differentiation for this strategy – we really like to pay the right price for our companies and focus on valuations, as much as quality, so our portfolio won’t hold companies that have extremely high valuations.
BB: Our approach has delivered consistent long-term outperformance, illustrated by the tracking error vs alpha chart below.
Compelling alpha generation and modest active risk vs. peers
Source: Morningstar Direct. Datashown represents the period when the current portfolio managers took overresponsibility for the Fund, 9/30/17 and shows the period of9/30/17-03/31/2023. Impax Large Cap Fund– Institutional (PXLIX) tracking error 3.1, alpha 1.4, vs S&P 500 Index.
The Impax Large Cap Fund typically holds 40-60 securities; how do you build conviction in a name?
AB: We go through a rigorous four-step investment process. During steps 1 and 2, we decide whether or not a stock meets our A-list criteria to qualify for Impax portfolios. After the stock is eligible for investment, Barbara and I discuss whether it is an attractive name for inclusion into the portfolio.
We normally start at a relatively low weight as we get to know the company, meet the management team and perform further due diligence. If we like the results of this work, we will add to the position size.
We are highly aware of the risk that one security can dominate the performance of the overall portfolio, so we have strict risk parameters that limit the idiosyncratic risk of any one name. While we have high conviction in many names in the portfolio, we respect the fact that these are public securities, and we don't have perfect information about them.
BB: We tend to build conviction over a few months in a name. We set target prices that look out 12-to-18-months to determine what we think a reasonable investor would pay for the stock over that timeframe.
You’ve previously identified six sustainability megatrends. Do these trends drive you to invest in certain sectors?
BB: We’ve identified six sustainability megatrends that we think provide long-term tailwinds. Those include vehicle electrification, resource efficiency, access to finance, evolution of cloud computing, clean water and transformative healthcare. While we are bottom-up investors, we find that as a result of our investment philosophy and process, there are several portfolio holdings that relate back to these trends. One example is an auto parts supplier that is solely focused on the electrification of vehicles and autonomous driving. This company is providing the essential systems required for the migration away from internal combustion engines to electric vehicles.
AB: I would add that these megatrends are going to play out over the next five to 10 years, so there will be select companies that will benefit over the intermediate to longer-term.
How do you balance incorporating top-down, bottom-up and fundamental sustainability analysis into your investment process?
AB: Sustainability analysis is embedded early in the first step of our investment process, by utilizing the Impax Sustainability Lens as a top-down tool and the Impax Systematic ESG (environmental, social, governance) score as a bottom-up tool. We use both of these proprietary tools for idea generation. From there, we take a deep dive, incorporating a 10-step analysis that incorporates fundamental, ESG, and sustainability analyses to uncover interesting ideas.
BB: We’ve had times where our tools identify a potential investment, and our 10-step process has eliminated it. Recently, our systematic ESG score guided us to an attractively priced secondhand retailer that was poised to benefit from a consolidating retail landscape. After applying our 10-step analysis, we hit a wall of uncertainty regarding the company’s ESG profile. Our analysis showed that the company did not have strong visibility into their supply chain and could not control their exposure to negative externalities around labor and waste. As a result, we did not invest in the company.
Looking ahead, what’s your outlook for the remainder of 2023?
AB: We expect a tough macroeconomic environment, with decelerating earnings estimates, an uncertain economic outlook and higher interest rates. We anticipate that markets will be relatively flat and volatile for the rest of 2023. Against this backdrop, stock picking will be at a premium. Our investment approach allows us the flexibility to capture opportunities across the growth/value spectrum and we will continue to be nimble and take advantage of pricing dislocations where we see companies well positioned for the transition to a more sustainable economy.
RISKS: Equity investments are subject to market fluctuations, the fund’s share price can fall because of weakness in the broad market, a particular industry, or specific holdings. The Fund is actively managed. The investment techniques and decisions of the investment adviser and the Fund’s portfolio manager(s), including the investment adviser’s assessment of a company’s ESG (Environmental, Social and Governance) profile when selecting investments for the Fund, may not produce the desired results and may adversely impact the Fund’s performance, including relative to other Funds that do not consider ESG factors or come to different conclusions regarding such factors.
Investment return and principal value will fluctuate so that you may have a gain or a loss when you sell your shares.
You should consider a fund's investment objectives, risks and charges and expenses carefully before investing. For this and other important information, please obtain a fund prospectus by calling 800.767.1729 or visiting www.impaxam.com. Please read it carefully before investing. Past performance is no guarantee of future results.
Impax Asset Management LLC is investment adviser to Impax Funds. Effective December 31, 2022, the name of the Pax World Funds changed to Impax Funds. Impax Funds are distributed by Foreside Financial Services, LLC. Foreside Financial Services LLC is not affiliated with Impax Asset Management LLC.
Impax is a trademark of Impax Asset Management Group Plc. Impax is a registered trademark in the EU, US, Hong Kong, Australia and Canada. © Impax Asset Management LLC, Impax Asset Management Limited and/or Impax Asset Management (Ireland) Limited. All rights reserved.
Alpha is a coefficient measuring risk-adjusted performance, considering the risk due to the specific security, rather than the overall market. A positive alpha reflects relative risk-adjusted performance of the Fund versus its benchmark.
Tracking error is the difference in actual performance between a position (usually an entire portfolio) and its corresponding benchmark. The tracking error can be viewed as an indicator of how actively a fund is managed and its corresponding risk level.
Impax Sustainability Lens methodology:
The Impax Sustainability Lens (“Lens”) is a proprietary investment tool that is used to assess economic opportunities and risks associated with the transition to a more sustainable economy, in order to help our portfolio managers weight their portfolios toward sub-industries that we believe offer higher opportunity and lower risk.
Using the Lens, Impax analyses all 158 MSCI GICS sub-industries against eight categories of opportunity and nine categories of risk that we have identified, scoring each sub-industry on a scale of 1 (lowest) to 5 (highest) against these 17 Lens categories to produce composite opportunity and risk scores. Based on these composite scores, each of the sub-industries is ranked by percentile as high (top third), neutral (middle third), or low (bottom third) for both opportunity and risk. These categories, assessments and rankings are conducted by Impax staff and as such will include subjective judgements and conclusions with which others may disagree. The 17 categories are:
In Impax’s view, sub-industries that it ranks as High Opportunity or as Low Risk are better positioned to benefit from the transition to a more sustainable economy. Sub-industries that rank as Low Opportunity or as High Risk are those more likely to face headwinds in adapting to the transition to a more sustainable economy.
The applicability of opportunity and risk categories may vary based on the particular sub-industry. For example, when evaluating the Life Sciences & Tools sub-industry, the “Evolving Healthcare Challenges” opportunity category is very relevant, whereas the “Access to Finance” opportunity category is not applicable. Thus, not every sub-industry is measured against all 17 opportunity and risk categories.
An Impax Lens Committee (“ILC”), which includes working groups composed of sustainability and sector experts, is responsible for governance and oversight of the Lens process and analysis. The ILC meets on a quarterly basis to review, and if necessary, revise Lens ratings across different economic sub-industries in light of current risks and opportunities.
The ILC and its working groups use a combination of independent research (e.g., third party investment reports, academic studies, reports from non-governmental organizations, etc.) and proprietary internal research to aid their analysis. Qualitative or subjective aspects of the Lens process may include the selection of issues and indicators we believe are pertinent to a particular sub-industry, the determination of Opportunity and Risk categories, and making judgements about the efficacy of technologies or societal benefits that derive from various products and services.
Limitations of the Lens methodology may include inadequate disclosure by or the availability of data about companies in certain sub-industries around issues that bear on Impax’s analysis of opportunity and risk. It is also possible that Impax’s opportunity and risk categories and analysis has not exhaustively identified all transition opportunities and risks, or has misjudged particular opportunities or risks, that may pertain in particular sub-industries. In addition, the Lens provides a top-down perspective about the typical opportunities and risks for companies by sub-industry; however, it does not evaluate to what extent a particular company is exposed to the opportunities or risks that the Lens suggests. The latter is done through bottom-up, fundamental company research that includes ESG analysis.
Impax Systematic ESG Rating methodology
The Impax Systematic ESG Rating is a proprietary rating of companies’ environmental, social and governance (ESG) performance developed by Impax’s Sustainability and ESG Team. The rating is designed to capture material information that may bear on a company’s risk and performance potential. The Impax Systematic ESG Rating combines original, in-house research and analysis with multiple sources of third-party ESG and publicly available data to quantify an overall ESG company ranking versus peers.
Third-party data used in the Impax Systematic ESG Rating calculation includes MSCI ESG Ratings and Sustainalytics ESG Risk Ratings. Both ratings providers provide Impax with ratings on ESG-related topics including, but not limited to, biodiversity and land use, energy efficiency, and climate change (environmental); occupational health and safety and human rights (social); bribery and corruption, and business ethics, (governance). The ESG ratings from MSCI and Sustainalytics both reflect company performance on a variety of sub-indicators designed to measure company ESG performance, disclosure, or management’s ability to manage risk or take advantage of opportunities relevant to the ESG topic. Sub-indicator sources include but are not limited to public disclosures, media, government agencies and NGO reports. The sub-indicators selected by MSCI and Sustainalytics may differ even if focused on the same or similar topics, as may the company ratings themselves. Additional information can be found on their respective websites, MSCI ESG Ratings ESG Investing: ESG Ratings - MSCI and Sustainalytics Company ESG Risk Ratings – Sustainalytics.
The Impax Systematic ESG Rating also includes indicators used in the Impax Gender score, which measures factors including, but not limited to, the representation of women on boards of directors and in executive management, the hiring, promotion and retention of women, gender pay equity, as well as a company’s transparency about gender diversity data. For further information, visit: Gender Lens Investing
The Impax Systematic ESG rating calculation includes some elements that could be considered qualitative or subjective, including, customized peer groups on limited occasions that may deviate from standard industry classifications in order to facilitate meaningful quantitative comparisons; selection of relevant ESG issues and indicators; determining weights or scoring of components/indicators; and some manual adjustments on occasions where the Impax Sustainability and ESG team determines that the calculated score based on available indicators does not adequately reflect the materiality or risk/return implications of certain ESG issues for a particular company.
Indicators obtained from third party sources such as MSCI and Sustainalytics, as well as carbon intensity data, are assigned weights that are tailored by industry, while the Impax Gender Score is assigned a consistent weight across all companies in the scoring model. Additionally, for all metrics previously noted, ESG scoring adjustments may be made to account for controversies or momentum, which assess a company’s progress or regression on ESG issues.
For Russell 1000 companies, Impax utilizes a proprietary Systematic ESG rating that is used somewhat differently in systematic portfolios than in actively managed portfolios. The Impax Systematic ESG Rating scores all Russell 1000 companies on a scale of 0 – 10, with 0 the lowest-ranking and 10 the highest-ranking score. Within active equities, the Impax Systematic ESG Rating is used in idea generation, designed to identify the ESG leaders within a specific industry peer group, with greater investment consideration given to companies that score > 5. Within systematic equities, companies with a Systematic ESG Rating < 4 are excluded from investment consideration. In these systematic portfolios, the weighted average Systematic ESG Rating of the portfolio is optimized to be at least 7.5.
Impax’s active equity and systematic equity strategies both exclude companies that manufacture weapons, tobacco and fossil fuel from investment consideration. Due to the exclusion of ESG laggards, and a focus on companies with stronger ESG profiles, both the systematic equity and active equity investment strategies will often have a higher Systematic ESG Rating compared to their respective benchmark. For more information, visit: Impax Systematic ESG Rating.
IMPX-1558
Andrew Braun
Senior Portfolio Manager
Impax Asset Management
