Impax Asset Management Group (LSE:IPX) — Investor Presentation

0:00 Good afternoon, and welcome to the IMPAX ASSET MANAGEMENT GROUP PLC investor presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and can be submitted at any time via the q and a tab situated in the right hand corner of your screen. Simply type in your questions and press send. The company may not be in a position to answer every question received in the meeting itself, but the company can review the questions submitted today and publish responses where it's appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to Ian Sim, founder and chief executive officer. Good afternoon to you, sir. Good afternoon, and thank you everyone for joining. So I'm gonna dive straight in and assume that, not everyone's, heard from IMPAX before, so just go straight to the beginning. And, just in summary, so IMPAX is a business I founded in 1998.

0:47 We are an investment management business serving institutional and wholesale clients around the world, managing, just over £37,000,000,000, investing in equities, fixed income, and private markets with investment team in,

1:02 Europe, North America, and Asia. And what, distinguishes us is our investment philosophy, which is, our view that we call the transition to a more sustainable economy, which essentially is a industrial revolution based on materials and energy efficiency on the one hand switch to clean energy and general in general, smarter, more efficient products and services. This industrial revolution, which has been building now since the the nineteen nineties, is accelerating and is full of investment opportunity, both superior growth and also mispricing. So that's what our investment teams are doing is exploiting those two, ideas and, generating medium to long term investment outperformance relative to generic indices.

1:52 So this industrial revolution really is powered by technology change, regulatory change, changing consumer sentiment. There's a wide diverse set of market opportunities and a large number of companies, both listed companies and private companies, which are are leading the way. This is a history of the firm for, twenty six years. And so each bar is the assets under management at the end of our financial year in September of the year question. So you can see from very small base of £15,000,000, we've grown to, over $37,000,000,000 sorry, £37,000,000,000, which has been a fairly flat amount for the last four years as we've navigated the the strong push in interest rates and inflation after the Russian invasion of Ukraine and then the mega cap tech boom over the last eighteen months or so. So more of that to come.

2:53 So what you're seeing today is the results from our of twelve months of of annual reports, we published very recently. So that's the year ending September 30. So, you can see here, we've reported revenue of a £170,000,000, a 31% adjusted operating margin, and, slightly rising cash reserves and, proposing to maintain our dividend to the same level as last year subject to shareholder approval. The same time as I'll go on to explain in a moment, then there's been a significant investment in the expansion of the business through two acquisitions in fixed income and some new product development in equities.

3:40 The investment conditions we're facing are, of course, the same that everyone else is facing, so it's been quite an interesting, challenging two year period post the, if you like, the the inflation spike of 2022, 2023, and 2024 have seen a huge market concentration around the so called magnificent seven mega cap tech stocks, generally rising markets, but strongly skewed towards US large cap. And, what that's meant for equity market sentiment is that broadly speaking, it's been positive, but anyone who's, not been market waiting or better in US mega companies tech has struggled to maintain relative performance against, generic indices. So that's the situation we found ourselves in.

4:26 We've therefore lagged the generic indices in many of our equity funds and, and and yet we're not alone. So I'm sure you've experienced this in other parts of your portfolios. What we've actually experienced is not a weakness of the underlying companies that we've been investing in, rather a de rating of the stocks of those businesses as multiples have come down on a relative and generally, absolute basis. Meanwhile, our fixed income business has been enjoying some a period of of relatively high interest rates compared to recent historical norms, and we've seen some great alpha opportunities around corporate corporate debt and mispricing.

5:12 In the context of IMPAX's investment philosophy, then we've seen in the last, couple of years a, quite a strong push towards, clean energy. For example, the UK government's clean power 2030, target, which is five years more ambitious than, pre the UK election. And also, generally speaking, a taming of cost increases for renewable energy as interest rates have plateaued and started to show signs of of falling. So that's broadly been encouraging. And there's some interesting challenges in electric vehicles around battery supply and consumer demand. But meanwhile, lots of investment going into insurance products and resilience around weather related risk and plenty of other opportunities around use of smart materials for materials efficiency.

6:12 Our investment performance, broadly speaking, in absolute terms has been excellent. So you can see some very strong numbers here. But as I mentioned before, the relative performance has been, weak and that's, been a period of sustained relative underperformance for the last couple of years, which has been, much longer than we'd anticipated. We had noticed or or experienced going into the u US election in November that, that relative underperformance had started to moderate, and there was, signs being shown of, quite significant improvement. But, fortunately, over the last month since, the election of Donald Trump, then, the uncertainty around policy trajectory and even the likelihood of a soft landing in The US has has increased dramatically. So there's been a flight to large cap, even mega cap stocks.

7:03 And with some policy indications and the prominence of Elon Musk in particular, then, of course, tech stocks have been back in favor once again. So in that sense, we are still in quite a choppy period with investment performance. But if you take a, through the cycle view and look at historical patterns over two, two and a half decades, then, the mean reversion back to historical, norms is, now long overdue, frankly. And, we, in a central scenario, are, optimistic of a of a positive, outturn over the next couple of years. So a few charts now showing the, the development of our business.

7:50 Read the chart left to right, starting at the end of the last financial year, pounds 37,400,000,000 moving through the first half to the solid green bar in the middle, the end of March, and then, the second half over on the the right hand side. So it should be self explanatory. You can see, outflows greater than inflows in both the first half and the second half. Market performance being positive in the in the first half and pretty flat in the second half with the net result of all that being that we pretty much went sideways over that twelve months period. Breakdown of funds under management. So the top left chart shows the equity funds that we run, listed equities in green and orange, thematic equities in green, non thematic equities or core equities in orange, and then fixed income and private markets at a much smaller scale. So you can see the business is really very significantly in listed equities.

8:51 In terms of the source of our, clients in the the bottom left, you can see the, Asia Pacific region relatively small. Europe and The UK, definitely the, significant majority of the firm, but I think IMPAX ASSET MANAGEMENT is particularly unusual in having being a UK domiciled or or headquartered, mid scale investment manager with a a very well established and successful US and Canadian distribution engine. So, that that's over quarter of assets under management and, about a third of our team. A bit more detail on the funds breakdown on the top right. And then bottom right, you can see the type of fund change between last year and this year. But, thing to draw out of this is BNP Paribas, BNPP AM asset management. So the funds that we manage for BNP Paribas asset management just over around a quarter of our revenue, and BNP Paribas Asset Management is our largest shareholder with, nearly 14% of the the ordinary shares.

9:59 So it has been our strategic, objective to be reducing that on a relative basis, to improve the diversification of the business, which we've done successfully, but but at a relatively modest clip. So I think over the last five years, it's dropped down from somewhere in the, mid ish thirties to to 25%. And but the relationship with BNP Paribas management remains rock solid and they are certainly the the client that gets the most attention as you could imagine.

10:31 Again, more detail on what's happened in the time period. So this is the, the breakdown over the full financial year in dark blue versus, the previous twelve month period in in green. This is the flows, net net flows for different channels starting with The UK and Ireland on the far left. And then in the middle, the standout, of course, is what happened with BNP Paribas asset management flows, which, were were more negative over the twelve month period that's just ended than in the previous twelve month period. That, situation had been moderating quite nicely in the fourth quarter, and but is not showing signs of improvement as the Trump administration settles down. We think that's just a relatively short term hiatus, so we're confident that will continue to improve.

11:27 So a few slides now on our strategic priorities. So listed in equities, of course, the significant majority, 90% or so of our assets under management. So we've continued to invest in the quality and breadth of the team and also been launching some new products. Themastic Equities, we've got a very strong track record in. So some new launches there with our so called social leader strategy, which is a blend of health care and financials, US version of our very successful environmental leaders product, and then an expansion of our Asian investment work to add Latin America to launch a emerging market strategy as well as a a non US or EFA strategy. Plenty of work going into new, strategy and product creation.

12:17 If you've listened to our reports over the last couple of years, you'll have definitely heard quite a bit about fixed income. So we've had fixed income investment management capability since 2018 when we bought a business in The US. We've added to that in 2023 with, more hires and, in particular, creating a new post as somebody who's heading up the division. And then the last, twelve months or so, we've completed two or we've we've advanced, two acquisitions. One which is completed, which is the one in Denmark, bringing in global high yield investment capability. And then the second which, is signed and announced, but not yet completed, subject to some regulatory approvals, which are a formality.

13:03 That's a larger deal, is a US based team, but European clients. So a very significant expansion over that time period of our fixed income capabilities. Plenty of exciting

13:15 opportunities to go for, and we are now gonna be consolidating these acquisitions, certainly wouldn't rule out making some more acquisitions if we can find find the right ones. We've also been considering expansion into private equity. So this is a business area that we've run since 2005. We are in the value add area and focused on renewable energy. So we are currently investing our fourth fund, have ambitions to, raise and manage our fifth fund, which will probably kick off in twelve months' time or so. But meanwhile, we're also looking at, other possibilities around acquiring, teams in the real asset space, not necessarily just in renewable energy, but possibly in areas like real estate and, and infrastructure.

14:08 Distribution is also a key element of the firm. So here we have historically had many third party distributors, of which BNP Paribas is the largest, but we have, another dozen or so in which we are the sub manager or or, provider of product on someone else's platform. And those partnerships are everywhere from Canada and The US through to Australia and New Zealand with, many countries in,

14:35 in Europe, in between. So that platform, third party distribution work is just over half our business, but we've also selectively been adding to our direct sales teams in recent years. So we have, I think, a dozen salespeople in Europe right now and, slightly more than that in in The US. So looking to build relationships directly with, with asset owners and, and their consultants, but also to, ensure that that our our brand is is widely known in the, the wider marketplace as well. So this twin track of institutional marketing direct and intermediary marketing using other people's sales and client service teams is a deliberate strategy of the firm and, I think is serving as well in producing a nicely diversified global client base.

15:31 And then, of course, at the same time, we are looking at the efficiency of our cost base and and trying to ensure that our infrastructure is scalable as as it can be. That's in part a question of, corporate services work that we do in back and middle office and IT systems, but it's also, around legal risk and compliance.

15:55 And with a headcount just over 300, then we are working very hard to to ensure that we're not increasing that materially unless there is an acquisition, like, for example, the, imminent Sky Harbor acquisition. We've also made some further investments in the last eighteen months or so in management structure, leadership training, and general career development for what's now quite a complex corporate structure. So just moving on to financial performance. I think this version of the slides, it's not the, the full, financial breakdown. Although, I'm now looking at the slides in front of me. Think actually, maybe it is the the full financial breakdown. So this is the summary here of of the results.

16:46 So I'm not gonna go through all this, but you can see that things were were fairly flat compared to the previous year, maybe slightly down, in terms of, adjusted operating profit,

16:58 on the back of of slightly lower revenues. But we are comfortably covering a full year dividend, which, shouldn't allow us to maintain the dividend at the same level as as last year with, with a coverage of less than, than sorry. With with a payout ratio rather of, less than 90%. So the, revenue performance here broken down on the, left hand side with the different components from flows and investment performance, and then critically, the fee margin, on the right hand side, which we've, been able to maintain in roughly the the mid forties 40 basis points for quite a few years now. This is reflective of a, quite a wide range of the high twenties basis points up to, 90 plus basis points for listed

17:56 products. So over 90 clients that come together to pay us fees, the blended average of which is shown here. In terms of cost base, then we have been working quite assiduously to manage cost to ensure that we are as efficient as possible. We've been looking for efficiency in terms of individual performance, but also team structure efficiency. So we have, had a small number of people made redundant or post been, made redundant in the last nine months just as we've identified efficiencies. And, we're also selectively experimenting with AI to try and further improve efficiency with which services are provided. But, we can't get away from

18:46 the fact that people is our largest cost and obviously most critical asset. So our people management skills are and processes are right at the heart of our success. So, operating performance, think pretty self explanatory. We've, seen a moderate reduction in, operating profit over the last few years as operating margin has come down. We did have an extraordinary period of growth in 2019 through 2021 when revenue was coming in so quickly that we couldn't actually employ the people in the right way to manage at full capacity. So we had extraordinary

19:34 peak margins up to the sort of 38%, 39% operating margin for those years, but that's been normalizing more to the early thirties over the last couple of years as is shown here. And then, also, as as you can imagine, a strong, prioritization around, cash management. We do have, a fairly tight turnaround in terms of flow from, our clients, so we're not, in need of a huge amount of working capital. But, we do have a

20:15 deployment of capital program, which I'll explain on the next page, but we're very keen on managing our cash flow so that we can give ourselves as much flexibility as possible. And you can see our dividend history there on the right hand side.

20:34 So capital position on the right hand side of this chart, 2024. So our capital surplus and and seed is at the top. We do have, seed capital in half a dozen funds, private and public equity, and are very disciplined about managing that to make sure it's not, excessive. We, have a capital requirement of just over £20,000,000, but clearly we need to or want to keep a nice healthy, buffer on top of that. So the the the balance sheet is is, efficient, does have some surplus, for example, for selective additional, acquisitions if the right thing were to come along.

21:20 And, in the meantime, we have been selectively buying back shares. We do think that, that's warranted, particularly given that every year we're issuing somewhere north of a million, new shares as part of management compensation, the expense of which is capped within a cap for for total, non salary compensation.

21:46 So just moving to the outlook then, I'm sure everybody is, sharing the uncertainty about what happens in twenty twenty twenty five with the US administration being unclear as to what its policy package is gonna look like and what that means for the trajectory for the economy in The US and for interest rates, and therefore, investor sentiment. So our central scenario is that, Trump is not going to act in a way that stokes inflation because that will be politically unacceptable or certainly unpopular, but rather to negotiate hard to improve trade terms for US companies and that therefore should benefit, US earning US company earnings and not depress multiples.

22:40 So our central scenario is is one of broad optimism. And actually, the mid cap biased industrial type portfolios that we tend to invest in with flexibility to to go into The US for most of them. Or to stand us in good stead and we're long overdue a mean reversion. So central scenario is is one of quite a successful couple of years ahead with the, derating that we've experienced in the last couple of years, finally, shaking out. There's no guarantee, of course, that's gonna happen. So we are thinking about how we would manage portfolios if if we end up in in a more inflationary environment. And also, we also need to be mindful that the mega cap tech stock boom may continue. It's probably unlikely certainly over that two year time period relative to everything else because the evaluation differential is really quite extraordinary at the moment, but it's not out of the question.

23:38 So I'm just gonna pause and return to questions in a moment. But I think just in summary, then the investment management world is to to some degree, in a barbell in which on the one hand, there's trillion dollar plus asset managers with low fees, and on the other hand, there's, alternatives and private equity managers. But in the in impacts the space, which is £40,000,000,000, $50,000,000,000 or so, then there's certainly I think we've demonstrated that there's a global demand for managers with specialist ideas around strong alpha and beta opportunities, which is certainly what we are advocating and have been doing for a long period of time. So we believe we're the world's largest, longest established manager with this particular investment idea.

24:27 It's not ethical investing. It's not ESG. It's not impact investing. It's simply investing in an industrial revolution, which, has some compelling drivers where a specialist team can really add value. So we're looking forward to building on our client base in this area over the next few years. We do think we've got a nice array of products. We would like to be a little bit more diversified with more in fixed income, but we're on the road to to achieving that. And, with a very well established client base and management team owning just over 20% of the business, then we think we've got a nice alignment of interest. So I'm gonna pause there and happy to address any questions. Ian, thank you very much for your presentation. Ladies and gentlemen, please do continue to submit your questions. You can do that just by using the q and a tab that's situated on the top rack or your screen. We have received a number of questions throughout today's presentation, and I'll start the q and a session off with the first one here which reads as follows.

25:24 What specific actions are you taking to improve your assets under management inflows, please? How does the sales in Asian and US markets in the last few years compare to your expectations?

25:36 So, new sales is a function of having the right products with the the right packaging in the right markets. So we are expanding our product range, first and foremost. So we're offering more types of or the broader range of products. So for example, we've now got fixed income products in Europe, which we haven't had before, and we have got some new thematic products around infrastructure and, the social leader strategy. So, taking steps to broaden the number of of investment strategies. We're launching new fund wrappers, so that means new usage funds. We've moved the funds from our Danish acquisition from Luxembourg to Ireland, to allow them to for more straightforward sale throughout Europe.

26:28 And then specifically in Asia and The US, we are encouraging Asian clients either to come to us directly with segregated accounts in larger strategies or we are sub managing accounts on the Asian groups' platforms. For example, Australian mutual funds, which we're sub managing. In some cases, those Australian or or more likely, actually, Asian investors are are able and willing to invest in the Irish usage range. And then in The US, this has been a a process that's been underway for a long period of time. We have a dozen so called nineteen forty eight mutual funds on the, the mutual fund platform, IMPAX label, but we've also been launching with larger wholesale private wealth managers, segregated accounts, or so called collective investment trusts on on their own platforms. So being really quite client responsive and nimble to the, the vehicles that we are, able and willing to run. And we are actively looking at, setting up an act so called active ETF, which is the way that the, The US market appears to be heading at the moment. So that's probably a initiative for 2025.

27:43 That's great. Thanks very much. The next question here, where do you see the company in five to ten years' time? Gosh. Well, look. I I think the most important thing to to point to is the fact that we are in an increasingly AI and tech driven world with increasing focus on costs, and that's impacting financial markets as much as as anything. And so I think the the the impacts business is is gonna thrive because it focuses on areas that are being disrupted, high high growth and material change driven by technology and regulation and and, let's face it frankly, change in consumer sentiment.

28:34 So that's where technology is gonna struggle to anticipate trends, and that's why we're gonna focus our active management. I think having said that though, we, will remain interested and and, willing to do more in private markets and also more potentially in systematic, model driven portfolios. The transition to a more sustainable economy, we think, is a a set of, of trends and an industrial revolution that will play out over five to ten years and more. That investment thesis, is good for for that time period, if not, if not much longer. And we do think that the clients are, gonna remain brand aware in asset management and want to believe that they're investing with a group that they understand and obviously that they can trust. So I think over that time period, there's every reason that IMPAX can remain an independent global player with a deeper client and product base.

29:39 Thank you. And turning to the next question. With expectations of soft landing for The US economy, what specific macroeconomic trends do you foresee as most supportive for your investment strategies over the next twelve months? Well, I think broadly speaking, with 90% or so of our assets under management in equities and a bias towards what you might call quality growth or growth at a reasonable price, then we do have a correlation to cost of capital and and hence to base rates. And so gently declining base rates are generally pretty good for for what we do as cost of capital drops and therefore valuations can can improve. And then, I think the very significant outperformance of mega cap tech over the last two years has meant that there's a huge valuation anomaly according to fundamentals.

30:34 So we are looking for that valuation anomaly to to be reduced or or potentially removed. If we end up with a situation in which inflation remains persistent and interest rates don't come down quite so quickly, we're going to have to be, more nimble in stock picking and the stock selection is going to have to be, less quality growth oriented. So we're up for that, but we can't guarantee to be outperforming in that scenario. Thank you very much. The next question here. With your fourth renewable energy fund closing successfully, what's your expectations for private market investments in the next year? Well, we are doing two things right now with the money we've got. So firstly, exiting our third fund, which we are quite well advanced, but still need to do quite a bit more. And secondly, investing our fourth fund.

31:33 So that's keeping the team very busy and it's likely to be the absolute focus of our work in private markets area for the next twelve months. We do have an eye on setting up a fifth fund, if things work to plan, ought to be ready for the market in roughly twelve months' time. And then we have not, closed our ears to ideas around other real assets investment work that I as I mentioned before. So that would almost certainly involve bringing in a team or maybe even buying a boutique in a a related area of of real asset investing. Thank you. Some strategies underperformed due to market concentration in mega cap tech stocks. What changes are being implemented to mitigate this in similar future scenarios?

32:27 Well, I think as we found in 2001 and 2007 and to some degree in the 2011, Eurozone Crisis period, you can't outperform it in every market and and, certainly with a thematically driven investment idea, clients don't sophisticated clients don't expect us to outperform in in every market. So the answer is that that we're not changing our investment process, but I think we are, looking at the impact of of AI in particular for core sectors to see whether there's, valuation anomalies that that, we haven't researched in enough depth. So we're definitely not falling into the trap of of doing a pivot on our investment process just at the the wrong time in the market because you really don't get forgiven by your clients for for doing that. What it does mean is that we've had a, in 2024, a longer period of relative underperformance compared to expectations.

33:33 But as I shared in the earlier chart, absolute performance has been very strong. So clients have seen their their wealth expand considerably. It's just that they would have made more money if they'd invested even more in mega cap tech stocks. Thanks very much. And the next question asks if there's any guidance on what the sector allocations might be for the newly funded full fund. Will and then will the the fifth fund be substantially different from that? Think this is a reference to the private equity funds. So, yeah, we're not really publishing where the investment pipeline is is sitting at the moment. What I can say though is that, we've seen continued strength in the European pipeline.

34:22 So all over Europe, there are some interesting opportunities. We're continuing to focus on solar PV and on onshore wind, and to some degree on hydro. So continuing to avoid material technology risk, significant technology risk. We have, been investing successfully in The US in fund four, but there is a limit to the exposure that we can take in The US, so we'd like to max out on that. And then we have been also looking at areas such as electric vehicle charging and battery storage to to some degree to to a minor extent. Thank you for that. We've got one final question here. And it asks, does the change in AIM tax rules as announced in The UK budget have any impact on your thinking?

35:13 Well, we've been on AIM since 2001 effectively. We reversed the private, impacts business into an AIM shell company in 2001. And so we've we've been on the AIM, since since then. Been very happy actually being listed with relatively moderate reporting requirements. And so we certainly were not welcoming of the idea that a market would be challenged in terms of the inheritance tax benefits. Frankly, the policy results which was non zero but also not as bad as had been feared was not something we'd anticipated. And probably like many, if not most observers, are, keeping a watching eye now on what, market reaction, will be. So the initial signs are that, liquidity hasn't really hasn't really changed and is is okay, but our stock has been quite significantly de rated.

36:18 So we are I think our central cases will carry on with with being on AIM, but we are not averse to looking in more more depth at the pros and cons of going on to the the main market. And, we've also not ruled out, going private if if there's a strong logic, around doing that. So I'm afraid it's a a wait and see answer. Ian, thank you very much for answering the questions. I think you you actually managed to answer all of them. What we will do is we will publish responses on the investor meet company platform. But just before redirecting investors, provide you their feedback, which is important to you and the company, Ian, could I just ask you for a few closing comments? Sure. Thank you. Well, look, really appreciate, everybody listening and, for the questions. Do give feedback as to what else you'd like to see next time because this is a very useful platform for us and we will certainly be back. So if you'd like to see us again and you'd like something different, then now's your chance to to say. Look, I think, putting aside the short term, turbulence around what's going on in geopolitics and some degree The US economy, then I think we are in in a period in which, inflation largely has been brought under control and interest rates are heading south, hopefully quickly, but but no guarantees, but but definitely in that direction.

37:42 So in that context, the market's sentiment for growth equities, quality growth companies, growth at a reasonable price, which is where IMPAX is focused, is very strong and we are expecting a very significant mean reversion. The industrial revolution around clean energy is a secular trend for our lifetimes and the mispricing that's coming out of that is continuing to provide great alpha opportunities. Meanwhile, many of the companies that we've been investing in for a long period of time are now positioned where they're strong enough to borrow money to fund their growth and so there's a new fixed income opportunity arising. So as I was told about six weeks ago in Canada, IMPAX is the largest manager in this area globally now, probably the longest track record.

38:34 So in that context, when we pitch up from the four corners of the earth and offer our services in this space and people who are interested in this area generally know who we are. That's a good foundation for further expansion. So with management, as I said, earning just over 20% of the business, there's a very nice alignment of interest with external shareholders. We are very optimistic about the medium to long term growth potential. So really appreciate your interest, for those of you invested with us, your support, and, look forward to answering your questions and being in touch over the coming months. Thanks very much. Ian, thank you once again for updating investors today. Could I please ask investors not to close this session? As you now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations.

39:19 This only take a few moments complete, but some should be greatly valued by the company. On behalf of the management team of IMPAX ASSET MANAGEMENT GROUP PLC, we'd like to thank you for attending today's presentation, and good afternoon to you all.