Investment themes come and go, but investing in water has stood the test of time. Water can be central to many of the sustainability challenges facing the world. Investors seem to increasingly recognise this in recent years, creating a strong inflow of new investor money.
Theme investing is often related to the coming and going of hypes. Consider, for instance, the many internet and IT funds launched at the time of the dot.com bubble. A vast majority of those funds no longer exist after incurring hefty losses around 2001. Some themes stand the test of time better. Water is a case in point.
Some of the longest-standing strategies were launched at the turn of the millennium. The investment theme around water is simple to make. Water is indispensable for all life on earth, but available supplies are limited. In addition, many of the climate challenges and risks we face are reflected in the water theme, think for example of water pollution and global warming; which is causing rising sea levels and floods on the one hand and increasing drought and water scarcity on the other.
This provides a good breeding ground for companies coming up with solutions to these challenges. Some examples of companies in which water funds invest are Aalberts
(producer of piping systems for the distribution and regulation of water or gas flows), Arcadis (engineering firm), Geberit (producer of sanitary systems), Veolia Environnement (utility company active in water, waste treatment and energy), American Waterworks (provider of water and wastewater services) and Ecolab (provider of services, technology and systems specialising in the treatment, purification, cleaning and hygiene of water).
Inflows at all-time high in 2022
This realisation seems to have fully dawned on investors only recently, as assets in water funds have only been on a surge in recent years. Until 2014, assets under management hovered between €3bn and €5bn, before steadily more investor money started flowing into the category. A trend that accelerated in recent years with inflows of €3.1 billion in 2019, €2.7 billion in 2020 and an all-time high in 2022, when investors put as much as €5.4 billion of new money into water funds. Last year saw a cooling off given inflows of €918 million, but that is probably more attributable to the difficult stock market climate than waning interest in the category.
Mainly thanks to the hefty inflow of new money, the total assets under management of funds in the Morningstar equity sector water category have increased to over 31 billion euros as at the end of January 2023. Those assets are spread across 56 funds available in Europe. However, about two parties manage half of all the assets.
Pictet-Water is the largest player with assets of €8.3 billion, while BNP Paribas Aqua (managed by Impax) has fund assets of €7.2 billion. Number three RobecoSAM Sustainable Water Equities follows at a suitable distance with €3.5bn.
Top 5
This week’s top five lists the five best-performing funds, as measured by distribution fee-free share class available in the Netherlands, in the Morningstar Share Sector Water category based on their performance over the period from February 2022 to the end of January 2023.
KBI Water fund
The highest return was achieved by KBI Water. Launched in 2000 by KBI, a subsidiary of French fund house Amundi, the fund is one of the longest-standing strategies in the category. It is managed by experienced manager duo Catherine Cahill (since 2009) and Matthew Sheldon (since 2011), who are both part of the Natural Resources Equity Strategies team that focuses on investment stocks related to water, clean energy and agriculture. This fund invests in companies providing solutions to water scarcity and invests in companies in all parts of the water cycle, including water and wastewater companies, water infrastructure and water technology. The portfolio had a total of 48 positions at the end of January 2023, with the concentration envisaged by the strategy reflected in the combined weighting of 48% for the ten largest investments. Danaher, Veolia Environnement and Essential Utilities were the fund’s three largest holdings in this regard.
L&G Clean Water ETF
L&G Clean Water ETF holds the second spot. This tracker tracks the Solactive Clean Water Index. This index comprises shares, per 54, of companies that fall into one of the following categories: utilities with at least 90% of revenue derived from water activities, engineering companies with at least 50% water-related water revenue and technology companies for which the revenue threshold is 5%. The index is evenly spread with position weightings ranging from 2.72% to 0.57% and 25% in the ten largest positions. The three largest positions are Sulzer, Evoqua Water Technologies and Rotork. The best-performing stocks over the past 12 months to end-January 2023: Companhia De Saneamento Basico Do Estado De Sao Paulo (62.78%), NOV (54.89%) and Consolidated Water (52.29%).
Thematics Water just missed out on a podium spot. The fund is one of eight strategies offered by Thematics Asset Management. This investment boutique is part of Natixis and was founded in 2019. As its name suggests, it focuses on offering thematic funds that seek to capitalise on secular growth trends. To build this thematic boutique from scratch, it lured away a team of five experienced investors from rival Pictet, among others. Arnaud Bishop and Simon Gottelier were part of that company. They were both previously co-managers at Pictet-Water and now sway this fund. The strategy focuses on companies involved in water demand management and pollution control, as well as in water infrastructure companies such as utilities. The benchmark agnostic bottom-up approach results in a portfolio of around 50 stocks with one-third of assets invested in the 10 largest positions. As of end-December 2022, the fund had the same top three holdings as KBI Water.
Ronald van Genderen is senior manager research analyst at Morningstar. Morningstar analyses and evaluates investment funds based on quantitative and qualitative research. Morningstar is one of Investment Officer’s knowledge partners and ranks five mutual funds or providers every Friday.
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