Jupiter’s Wallace: ‘We’re taking meaningful positions in businesses’

Investment trust forgoes annual dividend, but stands firm with new growth strategy

Since Jon Wallace took the reins as portfolio manager of the Jupiter Green Investment Trust in September 2020 he has transformed the strategy from yield to growth and quickly found the fund tested by challenging market conditions.

Last month, no annual dividend was paid out as the investment trust continued adapting to the new course. The company made a £6,000 loss in the year to 31 March 2022, performance was down 22.8% year on year in September and dividend yield is 0.32%. It is trading at a -19.92% discount to net asset value (NAV).

Apart from the challenging environment for sustainable funds more broadly at the moment, Wallace (pictured) said there has also been trials that come with changing the strategy.

“The characteristics of [yield and growth] have been very different so there has been some turnover in the underlying shareholders,” Wallace stated.

However, he also pointed to the fact the investment trust’s performance has been somewhat buoyed by, among other things, the Inflation Reduction Act (IRA) in the US, which spurred investor confidence in green opportunities.  

Smaller business opportunities

Wallace explained his continuing conviction in the strategy to ESG Clarity, including what he sees as the compelling case for investing in smaller, innovative companies and why he sees an investment trust as being more capable of positive impact than larger funds.

“The Jupiter Ecology Fund [manages assets of] £740m and the investment trust is £50m, which means we can be a bit more nimble and can take positions in businesses that are either smaller or earlier stage or perhaps a little less liquid. They often overlap,” he said.

“There’s a lot of opportunity in those parts of the economy [like agriculture and heavy industry] where we think the smaller, earlier-stage businesses that are coming into that space and really seeking to disrupt it are probably what’s going to determine how much progress those whole sectors make over time.”

Wallace illustrated this with the example of the electric vehicle industry, which has “changed because of a newcomer, not because of an incumbent changing its strategy around electrification”.

Previously, the trust was invested in larger, established businesses but with the support of the board in 2020, Wallace redirected the strategy and it began using the MSCI World Small Cap Index.

“Given how much the world was changing and how much opportunity there was in spaces – for example, in new materials businesses within our circular economy theme, within pockets of clean energy which had not yet had much traction, such as around the hydrogen economy – it was better to be more skewed towards those earlier stage innovators than it was towards those larger more established businesses.”

Meaningful positions

There are six main areas of investment in environmental solutions the trust uses: clean energy, circular economy, sustainable oceans and freshwater systems, green buildings and industry, green mobility and, finally, sustainable agriculture and land ecosystems.  

The portfolio manager went on to describe how he and his team are able to invest for impact in these areas. He said he is interested in what he calls “additional projects and capital allocation” – investments and activities that would not necessarily have happened without being invested in through the trust.

“It’s great to have a portfolio that can access that in a more meaningful way than larger funds where a function of their size means they can’t take as many meaningful positions into those sorts of early-stage businesses,” he said.

“The investment trust landscape is actually more conducive to environmental impact. It’s not the case that all of our investments will be something I would say hand on heart will generate impact. But we do have examples of businesses we’ve invested in, where we have provided that business with the direct capital to go in and to commercialise what they’re seeking to do.”

Deteriorating listed space

Jupiter Green is also well-placed to work with growing companies that are somewhat reluctant to go public, according to Wallace.

He said there seems to be a trend of businesses not wanting to be held to the tight timeframe of raising capital and listing amid a flurry of other initial public offerings when the market is favourable.

“If you’re a well-managed business that’s thinking very long term, you want to maintain that optionality, and not have to be so contingent on raising capital in a small market window.”

There is also the support a small, growing company – often experiencing teething problems – needs, which it might struggle to find among shareholders in the current equity market.

“You can see periods in the marketplace recently where share price moves have just become detached from fundamentals [such as]… share price pullbacks when actually the fundamentals are the same or in some cases, indeed, strengthening,” Wallace said.

“The market environment and the listed space is deteriorating in terms of how that sort of [innovative] business is being viewed in the marketplace and how it is valued ultimately.

“That’s not necessarily helpful to a management team. If you have options and you are a very credible, long-term minded management team with a good strategy and fundamentally a good product or service, you may want to maintain that option to stay private or to postpone your listing.”

Clean energy boost

The equity market has become a more favourable place for many global clean energy companies thanks to recent progress with the IRA, Wallace said.

He explained how the IRA has reversed the headwind his team was seeing for the first half of this year. Earnings of global clean energy companies such as those held in the fund tend to be disproportionately impacted by their US operations. And while political momentum on the IRA – and the energy policies within it – was stalled for months, this was reflected in these companies’ financials.

“Now you can see that reversing and the equity market is definitely pre-empting meaningful contribution again linked to a more rapid [roll out] of traditional clean energy in the US,” he said.

“That means allocation we’ve had within our clean energy theme to underlying US exposures has performed really, really well.”