Pictet Water is among the funds and shares providing exposure
Thursday 17 Jan 2019 Author: James Crux

Water is an essential resource for life – no one can live without it. Beyond its basic functions of sustaining life, water is also a precious commodity. Its supply is limited and global challenges such as population growth, urbanisation and climate change are putting existing water resources under increased stress.

The global issue of water access is a two-fold problem: safe drinking water is hard to come by, while basic access to sanitation is less common than one might expect.


2 EXAMPLES OF WATER-THEMED EXCHANGE-TRADED FUNDS

Lyxor World Water ETF (WATL)

iShares Global Water ETF (DH20)


Put simply, 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 and one that benefits from trillions of dollars of investment.

And as the role of private companies in the water value chain steadily increases, so does the size of the long-term investment opportunity, whose attractions are supported by the rising M&A momentum in all parts of the water industry.

Investors can get exposure via funds such as Pictet Water (B516BZ3) which invests in companies operating in the water and air sector. It has achieved 10.9% annualised returns over the past decade.

Other examples of water-themed funds include RobecoSAM Sustainable Water (B8DPYR2) which has achieved 10.7% annualised returns over the past three years, says Morningstar.

OPPORTUNITIES ON TAP

The private water supply sector, which consists of the supply and storage of drinking water, is one great example of the problem and the opportunity.

According to the OECD, by 2050, up to 4bn people across the world could be living under ‘severe’ water stress, up from 1.2bn today.

Economic growth is only exacerbating the water shortage. This is because it boosts personal wealth, thereby driving increased consumption of products requiring more water to produce.


4 EXAMPLES OF LONDON-LISTED WATER-THEMED COMPANIES

Amiad Water Systems (AFS:AIM)

Modern Water (MWG:AIM)

Severn Trent (SVT)

Water Intelligence (WATR:AIM)


Tight budgets and ageing infrastructure mean governments around the world are increasingly unable to maintain supply, so there will be countless opportunities for companies involved in innovative water supply solutions, such as water recycling and desalination, to profit.

A THIRST FOR GROWTH

Pictet Water fund invests in companies providing water supply, water technology or environmental services. Pictet Asset Management’s Cédric Lecamp and Louis Veilleux actively manage the portfolio using a combination of market and fundamental company analysis to select companies they believe offer ‘secular growth prospects at a reasonable price’.

The fund invests globally, including in emerging markets and mainland China, and the portfolio had 54 positions as at 30 November 2018.

Pictet Water’s managers score companies on the strength of the business franchise, their ESG (environmental, social and governance) focus and the quality of management as well as valuation prospects. ‘We try to apply a barbell strategy of a defensive core of utilities and more economically sensitive companies,’ adds Veilleux.

OBTAINING SUPPORT FROM TRUE EXPERTS

‘The DNA of this fund is built upon an advisory board of scientists, academics and engineers that helps us define the strategic direction of the investment universe,’ says Lecamp, keen to stress the long term nature of the investments in the portfolio. ‘Our average turnover is less than 10% and the average duration of our holdings is 10 years,’ he explains.

In terms of the investment threshold for the fund, Lecamp explains that at least 20% of a company’s value has to be linked to the water theme, although he will look at a company’s future prospects and would consider a company that is investing a lot more capital in water activities.


COMPANIES IN PICTET WATER'S PORTFOLIO

Companies in the portfolio include the likes of water and wastewater services duo American Water Works and Aqua America; and Thermo Fisher Scientific, the scientific instruments leader with water quality testing and laboratory products.

The fund also invests in Suez, which operates municipal water distribution and treatment systems in France and Spain; and Ecolab which is a water, hygiene and energy technologies provider established in 1924.


A good example is medical, industrial and commercial products conglomerate Danaher. He says: ‘35% of its value is linked to water and it is divesting some non-water related activities, which will increase its exposure to the water theme.

‘Management has an exceptional track record on return on invested capital, as they are extremely good allocators of capital,’ insists Lecamp.

Significantly, this capital allocation extends to corporate takeovers such as the recent acquisition of Pall which had been a holding in the Pictet Water portfolio for more than a decade.

Also in the fund’s top 10 holdings is Xylem, the largest pureplay water equipment services company in the world; a pumps, pipes and valves provider that has entered into the metering and smart data space.

‘Xylem is increasingly going down a data and software road to add value,’ says Lecamp. It recently acquired Pure Technologies which was also held in the Pictet fund for more than a decade.

‘We expect the performance to beat the global equity market over an investment cycle because of the barbell approach,’ concludes Lecamp.

‘The portfolio has performed best in choppy markets or where there is a correction because of the defensive core of utilities. We’ve done less well in the early stage of rebounds, such as 2009, because we are underrepresented in cyclical companies.’

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