Jupiter Green: small caps are the best place to make money with the ‘E’ of ESG
Shares believes it is worth paying a moderate premium to access the compelling growth prospects of the Jupiter Green Investment Trust (JGC), a nimble £57.5 million cap fund that invests globally in companies delivering solutions to climate change and other sustainability challenges.
Launched in 2006, the trust has lived in the shadow of larger open-ended sister fund Jupiter Ecology (B4KLC26), but new lead fund manager Jon Wallace, who also manages the open-ended fund, has upped the emphasis on growth and the trust should attract more interest from ESG-minded investors if it fares well versus its benchmark, the MSCI World Small Cap Index.
The backdrop for Jupiter Green is favourable, as climate change is one of the globe’s most pressing long-term challenges and governments are spending gargantuan amounts on green initiatives as the world seeks to ‘build back better’ from the pandemic.
This is positive for a portfolio with allocations to the US, where Joe Biden’s election has brought the world’s biggest economy back to the table when it comes to international efforts to address climate change, as well as the UK, Europe and Japan.
Investors are buying exposure to companies such as Vestas Wind Systems, offshore wind farms firm Orsted and energy and water metering systems specialist Itron.
SHIFTING THE FOCUS
The trust seeks growth across seven sustainability themes which have been accelerated by the pandemic: clean energy, energy efficiency, circular economy, mobility, sustainable agriculture, nutrition and health, plus water and environmental services.
Having recently taken over as sole manager following the departure of Charlie Thomas from Jupiter, Wallace is shifting the focus towards the mid and small cap companies which he believes will profit from these multi-decade growth trends.
‘Coming out of Covid and into the process of recovery, we’re seeing a lot of opportunities for smaller companies that have something innovative where they are addressing sustainability issues with an environmental focus,’ Wallace recently told Shares. ‘We want companies addressing markets that haven’t made much progress in terms of environmental sustainability. So, what we would call “difficult to tackle” sectors.
‘It is in those areas that you are seeing innovation coming typically from small cap companies. The size of the trust means that we can access those companies quite readily.’
Larger ‘established leaders’, such as high-energy efficiency boilers business AO Smith for example, will remain a proportion of the portfolio at a reduced weighting than historically, but there is now a bias towards ‘accelerators’ and ‘innovators’ that should make Jupiter Green Trust more exciting for growth-oriented investors.
It should be noted that the increasing bias towards smaller, innovative companies provides the potential for higher capital growth, but it may also lower the level of income available for distribution to shareholders as dividends.
INNOVATORS AND ACCELERATORS
These higher growth ‘innovator’ and ‘accelerator’ stocks are younger companies in the environmental solutions space which have the potential to deliver high rates of return from disruptive new products and solutions to tackle the green challenge of our time.
Often smaller in size than established leaders, the accelerators are companies which are gaining traction with proven and scalable products and services. They can have a medium-term growth trajectory which is greater than that of the overall market, given that they are expected to take market share.
One example is Tomra, the maker of reverse vending machines that collect bottles, cans and plastic from the public in return for credits and vouchers.
The innovators are smaller still. They have new and potentially disruptive products which have big potential but are yet to achieve a significant market share. Examples include fuel cell technology company Ceres Power (CWR:AIM), and Hoffmann Green Cement, a French company which is producing low carbon cement which could have a big impact on the construction industry.
Another innovator holding is Renewcell, a Swedish company part owned by retail giant H&M and which dissolves fabrics and recycles them into new textiles. This is a potential game changer for the clothing industry and fast fashion.
Jupiter Green Investment Trust has returned 96.7% over the past five years, slightly less than the 104.1% from its MSCI World Small Cap benchmark, according to data from FE Fundinfo. However, it has outperformed on a three-year basis at 49.1% versus 39.6% from the benchmark.