Posted inForum Q&A

Q&A with J O Hambro Capital Management

FSA spoke with Bertrand Lecourt, senior fund manager and head of thematic strategies, J O Hambro Capital Management, at the Fund Selector Asia Investment Forum Singapore.

How can the water & waste sectors help investors navigate the current economic environment?

Economies across the world have been focussing on monetary policies. In the recent years, low inflation and excess capacity led to a decade of falling capex after the financial crisis. Governments and companies alike are expected to increase fiscal spending and, in an environment, where the focus is on sustainability, water and waste companies are expected to be at the heart of such spending.

Water and waste stocks performed very well across 2021 and given the increased level of inflation, pricing power of our key holdings will continue be important in 2022. We believe that ongoing inflationary environment will normalise, but inflation will continue to be at a higher than usual level, especially in early 2022 before supply-side issues are resolved. We expect demand to stay at elevated levels and companies that execute well will come out as winners. This macro environment bodes well for water and waste companies, and we continue to maintain a balanced portfolio. Most importantly, despite macro uncertainties, the longer-term positive outlook and structural drivers for the theme remain intact.

How much of an influence does government policy have on the sector and the strategy?

Government policies only have an indirect impact on the water and waste theme by pushing for safer and more sustainable regulations. Regulated utilities only represent less than 15% of the investable universe and even these businesses can pass through costs to customers and generate robust returns. The remaining 85% of the universe consists of competitive businesses striving to maximise stakeholder value like any other listed company.We believe regulation is a driver for the theme, not only for regulated utilities. Regulation is mostly local or assets specific, mostly from an independent body not from the State

Looking at regulatory environment by key Region, we observe a continuous value creation sharing process for all stakeholders:

UK: Ofwat is the regulator and provides a value creation framework every 5 years. It resets the Asset Value over the period called RAB or RAV (regulated asset base/value). This stimulates investment and ensure that the value creation process is shared with customers.

US: Regulation to the cost of equity. Municipalities provide a RoE for water utilities to operate (for past 100 years ranged between 3 and 14%) with pass through of costs.

Brazil: Asset base system with Positive return on cost of capital (by region).

Secondly, new regulation is opening-up new opportunities for our companies. A few such examples include Ballast water treatment, PFAs regulation, and Hazardous waste management. Lastly, to reiterate, while not a direct regulation, we expect fiscal packages around the world will benefit our companies, especially as our companies are exposed to the sustainability transition.

The strategy is quite niche: what benchmarks do you use?

We believe that investors are increasingly changing their allocations and view of the world; whereby, we are witnessing higher allocation to thematic and sustainable strategies. The Regnan Water and Waste Strategy combines the best opportunities from the water and waste value chains, with a total investable market cap of USD 2.5 trillion and growing. Given the lack of specialised water and waste benchmark, we use MSCI ACWI Index (ACWI) as the comparator benchmark. ACWI is one of the most widely used global benchmark which captures large- and mid-cap equities across developed and emerging markets countries. We believe this is one of the broadest global equity benchmarks and therefore comparing the strategy’s performance against this Index is a suitable way of measuring against a global equity strategy.

The strategy has >90% active share to the benchmark and has extremely low overlap with global equity portfolios – providing much needed diversification away from widely held sectors such as technology, communication services, healthcare, financials, and energy, and also offers diversification in the sustainable space which has currently been predominantly focusing on carbon.

The Fund Selector Asia Investment Forum Singapore was held on 15 March 2022 and was sponsored by Columbia Threadneedle Investments, Janus Henderson Investors, J O Hambro Capital Management and Jupiter Asset Management.

Find out more about what was discussed and the strategies that were presented here:

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