Water is an essential natural resource and demand is rapidly increasing. With the world’s population expected to reach 9 billion by 2050, urbanisation and improved standards of living mean greater usage per person. Balancing demand and supply of water will be a difficult process, but it creates new investment opportunities for companies providing solutions, from infrastructure and distribution, to waste water collection and treatment.
When we started looking at water funds, we were surprised so many had businesses we weren’t expecting to see, such as crematoriums and pool servicing businesses. As we did more research, we found these businesses are there for good reason. Water efficiency is a key issue during cremations and effective swimming pool servicing means less water wastage, but is that thematically pure enough?
Many managers assess purity of a stock through revenue thresholds. For example, they might require that half of revenues be involved in sustainable water activity. This can vary by fund manager and it is why we spend so much time on due diligence and look-through on portfolios.
A few of the stocks that have come up in recent conversations include Danaher and PerkinElmer, both of which have been in the news recently.
Danaher announced in late 2022 its intention to separate a part of its business to create an independent publicly traded company. The new company will be comprised of Danaher's Water Quality and Product Identification businesses, which is a key reason it was held in many water funds. This corporate change will impact the purity of the remaining Danaher business, and the new entity.
Another stock is PerkinElmer, who last year announced that it would be divesting its food safety, environmental testing and industrial quality assurance divisions to focus on its core life sciences and diagnostics business. Any water-focused fund holding PerkinElmer became forced sellers of the stock as the company now has no water exposure.
As companies start to strategically focus on core businesses and cutting costs, there may be more such deals in the water universe. It is therefore important to focus on thematic purity and avoid stocks with low stock-level thematic exposure. This is why we spend time researching the investment process of our underlying funds and how they approach thematic purity.
The water investment opportunity
Water supply issues can be caused by improper solid waste disposal. In China, which has rapidly urbanised, it has led to nearly 60 per cent of the country’s underground water and a third of its surface water being classed as ‘unfit for human contact’. The Chinese government is determined to improve this situation, with its 2015 ‘Water Ten Plan’ putting in place tough targets on polluting industries. Companies operating in the environmental services sector who are providing solutions to waste water collection and its treatment are predicted to benefit.
There are plenty more interesting investment opportunities across all areas of the global water industry, with many funds that focus on water supply, water technology and efficiency businesses. However, fund managers who want to keep a high level of thematic purity find that the investable universe is not large enough to build a portfolio and so the common solution is to blend water exposure with food or waste, for example.
How do we get exposure?
In our Global Solutions* and Growth fund, we have exposure to Regnan Waste and Water, whose fund team believe there is no sustainable economy without water and waste management. The fund invests across the water and waste value chains, including into companies developing new technologies to meet the ever-growing demand for solutions to these challenges. Waste is expected to double over the next decade and we have to think of innovative ways to reduce or reuse materials.
We also own Schroder Food & Water in Global Solutions, a fund that is focused on the transition to make the entire food and water system more sustainable. It is estimated that around $30 trillion of investment will need to be made by 2050 to sustainably provide food and water to a growing global population and to limit global warming to below two degrees - the target set in the Paris accord. The team believe companies whose products and services are facilitating this movement will be in great demand and can exhibit strong long-term growth potential. However, there are also risks to consider. Thematic funds like this are generally more suitable for investors with longer time horizons and as part of a balanced portfolio.
No one can live without water, but global challenges such as urbanisation, population growth and climate change are putting this resource under increased stress. This means that the need to secure the current water supply, and increase its capacity through new technology and services, will be a major theme over the years to come. Funds investing in solution providers to the global water challenge are likely to represent attractive opportunities for investors for several decades.
*Please note that Global Solutions is an offshore fund only available in the Channel Islands and Isle of Man.
FINANCIAL PROMOTION: The value of investments and the income derived from them may go down as well as up and you may not receive back all the money which you invested. Any information relating to past performance of an investment service is not a guide to future performance.