Volatility was more restrained in August, and as the market rallied this fed through to the performance of the environmental technology universe. The on-going fall in the oil price over the month also continued to have no negative impact on environmental technology stocks. Relative to the broader market the fund performed broadly in line, however relative to the fund’s benchmark, the FTSE ET50, it underperformed.

The main reason behind this underperformance was due to our overweight position in a number of industrial stocks, including Outotec, Siemens, ABB and Atlas Copco. Despite these adverse share price movements, we continue to maintain our positive stance towards these names and believe the fundamentals remain intact. Our underweight to the solar sector also impacted negatively where the biggest negative contributions came from strong moves in LDK Solar and Solarworld. Conversely, the fund benefited from not holding stocks such as Schnitzer Steel and Sims Group, which in our view continue to look expensive and continued to have sell off as steel and scrap steel prices fell.

In the solar sector, results for Q2 were robust globally. This was as expected, buoyed by the exceptional conditions in Spain. Many of the names also raised 2008 guidance. More importantly, all companies cited continued strong demand, with pre-sold contracts at 20-50% in 2009. Share-price reactions, however, were relatively muted as investors looked to an uncertain 2009 as the industry potentially enters into oversupply (Q-cells guided for more than trebled production output by 2010 vs. 2007). Renewable Energy Corporation (REC) also announced that it will be constructing production sites in Quebec in stages (beginning 2010), with up to four plants of similar scale to Moses lake (6500 MW). We view this development as encouraging, as REC leverages its capabilities as a cost leader in solar silicon production. We continue to believe that upstream players will be the most resilient to the impending industry shake-out characterised by declining average selling prices (ASPs) at the cell and module levels.

Towards the end of August, sentiment turned quickly, especially ahead of the Valencia solar conference in early September, with some short-term investors hoping to get positive news from the conference. Whilst we remain cautious on downstream solar, sentiment towards the industry in general is improving due to increased utility-scale interest as evidenced by the surprise announcement from Sunpower on two utility contracts (FPL and Pacific Gas & Electric (PG&E)) with one of these (PG&E) at 250MW. PG&E's order for 800MW (500MW for thin-film solar and 250MW for polycrystalline solar) of solar power for the US, is the largest ever. The utility scale contracts are indeed a big positive for the solar sector. We know that utilities are very interested in putting solar PV in their portfolio as part of their Renewable Portfolio Standard (RPS) requirement. These PV farms are due to come on-stream in 2010, however project commencement is contingent on the passing of the US Investment Tax Credit (ITC) by year end. We continue to be confident with our underweight solar stance given a lack of catalysts to year-end and await the Q1 2009 results for insight into the industry's development.

In the wind sector, Vestas’ Q2 results were positive; the company re-iterated full-year EBIT margin guidance despite raw materials inflation. Crucially, Vestas management indicated a 30% rise over the consensus order backlog, including a sharp up-tick in US demand. The very high level of demand for wind power has benefited wind turbine manufacturers, where barriers to entry are formidable. Uncertainty over the extension of the US Production Tax Credit (PTC) remains, however, we believe only the timing and not the actual extension is variable. Unlike the solar industry which suffers from a lack of visibility, wind power is much more predictable as evidenced in the favourable reaction of the share prices of wind turbine manufacturers Gamesa and Vestas to increased order books and stable margins. We continue to be comfortable with our overweight position in wind and see the extension of the US PTC as the next positive catalyst.

In the water sector, water chemicals (Nalco) continued to remain highly volatile, mainly because of uncertainties regarding raw material input costs and pricing power of the suppliers in an overall declining market environment. A similar picture can be drawn for the construction and semiconductor related providers such as Pall Corp and Kurita Water, which face a further declining housing market and semiconductor downturn.

Overall, water as an investment theme continues to attract media attention as Sydney experienced its driest month in May since records began, again sparking calls for additional desalination plants. So far North America and Asia lead in terms of the number of newly issued water projects, but India also recently committed to additional investments in water infrastructure to ensure further growth of its economy and sufficient supply for its agriculture.

In the pollution control sector, performance was mixed. Stocks with end market exposure to consumer related products such as automotives were volatile. Whereas stocks with more stable, secular end market exposure such as waste to energy, waste disposal and testing were either flat or up in the month.

During the month, we made the following transactions in the fund. We slightly trimmed our position in Wacker Chemie. The company reported its Q2 results which were robust and demonstrated that the business is well positioned to benefit from the tight polysilicon market. In aggregate however, we are starting to become cautious on the outlook for the company’s other divisions. We raised our position in Suez Environment as an alternative to Veolia Environment, in which we sold the remainder of our position due to a lack of catalysts for the business. Suez Environment also has a more attractive valuation to Veolia Environment. Continuing with our cautious stance towards solar, we sold out of positions in Yingli Green Energy (a Chinese solar module manufacturer), Q Cells and Solarworld.

We continue to reiterate our positive long-term outlook for the environmental technology markets as the focus on the cost of energy, environmental pollution, climate change and ageing infrastructure will be some of the themes driving the need for the deployment of environmental technology solutions.