Interest in water funds, like sustainable investing more broadly, has recently waned among investors. This marks a departure from the peak during the COVID-19 pandemic, which saw significant inflows. Although there are more than 40 different funds in this category, only a few manage the majority of the assets.
Interest in sustainable investing gained momentum in 2019 and peaked between 2020 and 2022 during the pandemic. However, more recently, investor enthusiasm for sustainable investing has diminished. This trend is evident in the cash flows and assets under management (AUM) of funds within Morningstar’s Equity Sector Water category.
Prior to 2019, total AUM in the category did not exceed 10 billion euro. Since then, significant inflows were recorded, with over 2 billion euro in 2019 and 2020, and more than 4 billion euro in 2021. By the end of December 2021, total AUM in water funds reached 31 billion euro, driven by these inflows and strong performance. While another 1 billion euro flowed into the funds in 2022, the tide has since turned. Over the past year, investors withdrew 1.5 billion euro, and by the end of October this year, outflows exceeded 2 billion euro, reducing total AUM to just under 27 billion euro.
A notable feature of this category is its concentration. Despite the availability of 43 different funds, two funds account for more than half of the total AUM. Pictet-Water manages over 8 billion euro, while BNP Paribas Aqua, managed by Impax, oversees approximately 7 billion euro. These are followed at a distance by Robeco Sustainable Water and passive products such as the iShares Global Water ETF and the Amundi MSCI Water ESG Screened ETF. While thematic funds are often launched during periods of heightened investor interest, all these funds boast a track record of at least 15 years.
Most water funds invest in companies involved in drinking water supply (e.g., American Water Works and Severn Trent), water purification (Veolia Environnement and Republic Services), water quality and analysis (Thermo Fisher Scientific and Agilent Technologies), and water infrastructure (Advanced Drainage Systems, Aecom, and Geberit). Consequently, investors in these funds should be mindful of significant sector concentration. For example, industrials account for an average of 65 percent of fund portfolios, with the remainder primarily allocated to materials, healthcare, and utilities.
The strategies highlighted on Morningstar’s radar are characterised by strong management teams and robust investment processes, as determined by qualitative assessments from fund analysts or algorithmic evaluations using the same framework. This edition spotlights a fund that meets all these criteria. Robeco Sustainable Water is rated Average on the People Pillar and Above Average on the Process Pillar by Morningstar analysts, resulting in a Silver Morningstar Medalist Rating.
Robeco Sustainable Water
Robeco Sustainable Water is one of the oldest water strategies, managed since its inception in 2001 by Dieter Küffer. Küffer is a highly skilled and experienced investor in this category. His long tenure and expertise are critical to the strategy, though concerns have been raised about his workload, as he is supported by only two team members who are relatively new to the team.
Küffer has consistently applied his well-defined, structured approach, which is based on bottom-up stock selection within a robust thematic framework. The investable universe is created in collaboration with Robeco’s sustainable investment research team. After an initial screening, around 150 stocks are selected for further analysis, focusing on quality aspects and maintaining disciplined valuation awareness.
The portfolio is constructed without regard to publicly available indices, resulting in a well-diversified portfolio that may differ significantly from the concentrated S&P Global Water benchmark. For instance, the portfolio’s underweight in utilities stood at approximately 15 percent in 2021 but has fallen to single digits since 2022, well below the index allocation. At the same time, the portfolio’s exposure to industrials has increased significantly, while the healthcare sector remains structurally overweight.
Ronald van Genderen is a senior manager research analyst at Morningstar. Morningstar evaluates and rates investment funds based on quantitative and qualitative research. Morningstar is part of the Investment Officer expert panel.