The Company NAV rose 9.0% over the quarter, whilst the MSCI AC Asia Pacific ex Japan Index (£) rose 8.2%, the FTSE Environmental Opportunities Asia Pacific ex Japan Index (EOAX) (£) rose 8.4% and the FTSE Environmental Opportunities Japan Index (EOJP) (£) rose 14.4%.

The renewable energy & energy efficiency sector saw a general boost in the final quarter of the year as the initial announcements of the Chinese 12th five year plan listed clean technology, electric vehicles and renewable energy as core strategic sectors.

Energy efficiency stocks continued to be a key focus (particularly in China) driven by increasing industrial automation, grid investment and investment in buildings energy efficiency and the rail network.  The fund's overweight position in this sector supported its overall outperformance. Particularly strong energy efficiency stocks were China ITS (transport energy efficiency, China), which rose on the increased strategic importance of the Chinese rail sector and Delta Electronics (industrial energy efficiency, Taiwan) that benefitted from strong power electronics, auto and solar component markets. Renewable energy stocks such as China Longyuan (a renewable IPP) continued their run of weakness due to concerns over the regulations for European solar markets, grid constraints, rising interest rates and falling turbine prices.

Water treatment & pollution control outperformed as a weakening Yen drove positive performance in the fund's Japanese investments. There was good performance from water utilities in rapidly growing Asian countries and from strength in the environmental testing markets. Torishima Pump (water infrastructure, Japan) rose as the weakening Yen improved export potential, and Campbell Brothers (monitoring and testing, Australia) performed well on strong growth in its Australian mineral testing business.

The fund underperformed in the waste technologies & resource management sector as large index constituents in the Korean heavy engineering and Taiwanese chemicals sectors (that the Fund does not own) performed strongly. Underperforming stocks included Yingde Gases (pollution control, China), which fell on news that the government was rationing power to the steel sector, and Lee & Man (paper recycling, China) which had weaker than expected results.

The Cancun climate summit managed to rebuild trust and cooperation among delegates, but brought limited progress of relevance for investors. Agreement was achieved regarding a monitoring/verification framework and a Green Climate Fund managed by the World Bank to allocate up to $100bn in climate aid to the poorest countries by 2020. Uncertainty regarding the REDD-forestry mechanism, CDM and Kyoto Protocol frameworks remains. The US approved extensions of Bush-era tax cuts, including sizable direct environmental funding through cash grants and tax credits of $11bn for renewable energy, ethanol and energy efficiency. California approved cap & trade legislation to cap pollution from plants, cars and trucks by roughly 15% by 2020, taking effect from 2012.

In renewables, Italy is reforming and clarifying its incentives, by moving from green certificates to a feed-in-tariff, whereas France has a freeze in its solar PV development until March, when it is expected to introduce a new policy framework. Sweden and Norway agreed to establish a common green certificate market in 2012. Spain reduced tariffs for thermal solar and wind, and stunned investors with a retroactive cut in feed-in-tariffs and hourly caps for premium tariffs for solar PV. Turkey, on the other hand, ratified a new law guaranteeing prices paid for renewables, with wind in particular set to benefit strongly as investments of up to $30bn or ~19GW of new wind capacity might be developed within the next 4-5 years. In energy efficiency, Ireland introduced new residential energy efficiency incentives, including tax reliefs. The EU will introduce new fuel efficiency targets on vans and may move to tighten biofuel legislation by July 2011. The US DoE will provide $148m to accelerate the development of efficient vehicle technologies. 

In the water sector, India supported a regional protocol for water management in the Himalayan River Basin, as well as utilising a $1bn World Bank loan to start round-the-clock water supply facilities in 12 major cities. The Indonesian government has granted $6.3bn in funding for water resource developments in 2011.

Latest information available at: http://www.impax.co.uk/funds/listed-equity-funds/impax-asian-environmental-markets-plc

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