Fund Buyer Index

Investing in the world’s most important liquid

Posted in Dec 2019
by Kirsten Hastings

For the most part, the developed world is spoiled by its easy access to water. It literally falls from the sky and we can reliably turn on a tap to get clean, drinkable water 24 hours a day.

But while it covers over two-thirds of the earth’s surface, only 2.5% of it is fresh.

According to investment research and advisory company Edison Group, water is often ignored by (forgive the pun) mainstream investors despite being cited by the World Economic Forum as one of the five biggest threats to global economic and political stability.

The World Bank estimates that delivering the UN’s sustainable development goal six by 2030 will require over $100bn (€90.6bn) of additional capex on infrastructure and further development every year, globally.

That’s around 40% higher than current spending.

In its latest research report, Edison Group described water as “the real liquidity crisis”.

Not a drop to drink

Technology companies have been looking at water for decades, with desalination an obvious solution.

Just take the salt out of the water and viola – problem solved.

But it’s not quite that straightforward, according to Eoin Fahy, chief economist at KBI Global Investors.

Speaking to Expert Investor, he described the process as “inefficient and energy intensive”.

While not discounting its significance, he said that it is better to “look at conservation and reuse first”.

Ounce of prevention

Fahy is also head of responsible investing at KBIGI and works with a team that has been specialising in the sector for nearly 20 years.

One area of particular interest is how technology can be used to stop water waste.

As an example, he highlighted the digital monitors that help households gauge their energy and water usage.

“If you use a smart meter at the point where the water feeds into a housing development, rather than just the individual houses, and you register a massive increase in water usage, that tells you there is a leak,” he explained.

“Simple technology can help solve big problems.”

Currently, the third largest holding in the KBIGI water strategy is a US company called Xylem.

In December 2017, it acquired a firm called Pure Technology in which KBIGI was an investor.

The firm helps municipal water and wastewater service providers assess their existing pipe networks and determine if any are at risk.

A tennis ball-shaped device is run through the pipes and scans for weaknesses, enabling the service provider to proactively repair or replace its network before a rupture potentially sends tens of thousands of gallons rushing down the street.

“There are estimates that it is around 10 times cheaper to prevent a mains leak than to repair it,” Fahy added.

Blending new and old

The entire universe of stocks in which KBIGI can invest is limited to around 165 companies, of which it usually holds between 35-50.

And it’s not just tech start-ups, the number of utility companies in the portfolio takes the average age of the firms to 100 years.

While Fahy describes the performance of water stocks as “muddling along in the past few months”, 2019 as a whole has been a strong year, he said.

Playing the theme

Greater awareness of the impact that water shortages are having is driving interest in investing in the strategy.

The investment manager and vice president of UK wealth manager Kingswood recently commented on the forecasted 40% rise in demand for water over the next decade.

Harry Merrison said: “Globalisation and prosperous economic development have reshaped our world and created a wealthy middle-class, the people within which choose to enjoy their affluence.”

And this burgeoning wealth is having a detrimental impact.

“Beef production, for example, is one of the most water intensive agricultures requiring 15,400 litres per kilogram compared to just 2,500 litres for rice,” Merrison added.

Kingswood uses the Robeco Sustainable Water fund, which invests in companies specialising in irrigation services, water analysis and treatment technologies.

The Edison Group report highlighted Pictet Water, Fidelity – Water & Waste, and Impax – Water Strategy as other options currently available to investors.

Maximise returns

Dan Gardiner, director at Edison Group, said: “The water sector presents big opportunities for investors. Huge spending increases are needed over the next decade to both address underserved communities and upgrade existing infrastructure.

“The sector is particularly attractive to income funds and the growing pool of capital looking at sustainable and impact strategies.”

He continued: “More broadly, looking at investments in a range of other sectors, water risks need to be assessed more seriously and systemically integrated into decision-making processes to ensure that investors maximise their potential returns and achieve their investment goals.”



Originally posted in Expert Investor Europe

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