Why is water an increasingly attractive thematic investment?
Water is essential for life on earth and is a precious, yet underappreciated and undervalued resource. It is used in nearly all forms of economic activity including food production, industrial manufacturing, textiles, energy production and materials extraction – put simply ‘there is no economy without water’
Water use continues to increase rapidly, driven by: population growth, urbanisation, rising wealth and consumption and an ageing infrastructure – these same factors make water an attractive area for investment and it is linked to many of the UN Sustainable Development Goals (SDGs) which themselves are backed by long terms structural demand drivers.
The investment opportunity in water is broader and companies from across the water value chain can offer steady returns, and are less sensitive to the economic cycle than other infrastructure investments. They tend to provide visible cashflow, inflation pass through and defensive growth characteristics. The differentiated investment universe makes this a great complementary strategy to sit alongside other thematic or more widely held areas of the market such as tech, financials and consumer.
How do the water and waste value chains enable investors to generate long-term capital growth?
As mentioned above, we have identified 5 long term fundamental growth drivers for both water and waste: 1) urbanisation and concentration of population 2) consumption driven economy 3) infrastructure adaptation for developed and developing countries 4) supportive regulatory environment 5) support physical constrained world.
Companies with solutions to meet these needs and challenges are well positioned to benefit from innovation and technological improvements which drive greater efficiencies and respond to demand for better environmental, social and economic outcomes. The breadth of the water and waste value chain is immense and covers a range of services and products from ‘resources in to resources out’ this encompasses pump and valve manufacturers in the case of water, through to waste treatment and re-sourcing solutions which enable a circular economy. The investible universe has been built by the team based on experience.
What are the key considerations when assessing companies in this space? What differentiates the “winners”?
Given the differentiated nature of the universe, experience counts in identifying the winners from across the water and waste value chains. The investment team bring more than 20 years’ specialist experience. Investing successfully requires specific expertise in understanding the evolution of the industry and technical details, political and regulatory changes and specific company fundamentals including accounting details and sustainability research.
Typically, we look for companies with a strategic focus on increasing sales, margin expansion which drives profitability whilst ensuring that a key driver of their business value is exposed to the global water and waste investment themes which are backed by the structural drivers mentioned above. Successful businesses typically have strong sector positioning, have clear and often differentiated value propositions, are secular growth beneficiaries, have sustainable business models or are actively taking steps to enhance their operations and processes, have high quality management with proven experience in their respective fields and have high earnings visibility.
