Heterogeneous players help preserve water, an investment universe resilient to market downturns. With Simon Gottelier of Thematics AM.
Blue gold is at the very heart of economic development. Demand is rising in both emerging and developed markets, driven by demographic trends and business growth. The players involved in this colossal US$1,000 billion market are heterogeneous: suppliers of clean water, industrial companies, technology stocks and consumer discretionary names, among others. Simon Gottelier, Senior Portfolio Manager specializing in the Water strategy at Thematics AM, provides an update.
When we talk about the water market, what exactly are we talking about?
It’s worth around 1,000 billion US dollars. Total market growth is between 6% and 8%. The investment ecosystem includes companies that provide technologies to ensure optimal water supply and quality. These companies benefit from a visible and resilient long-term growth opportunity, and all focus (to varying degrees) on providing clean water, preventing and controlling water pollution, and reducing pressure on existing water resources.
As a natural and essential resource, water presents global challenges. What are they?
Climate change tops the list. Water management by governments and companies can influence its future, and new technologies such as “smart water” or the use of digital data are increasingly important supports in meeting these challenges. Then there is demographic growth, which implies greater demand on a global scale, particularly in emerging countries whose populations are growing rapidly as a result of accelerated urbanization. The sector is under-invested in developed countries such as the UK and the USA, where infrastructure is poorly maintained and repair costs could run into trillions of dollars over several decades. Regulation is the ultimate challenge, but it can also be seen as an opportunity. The global water system is subject to the rules of supply and demand, and on the supply side, chemical pollution is increasingly difficult to manage. Thus, the regulation of polluting substances represents a real long-term opportunity for investors, as these pollutants need to be identified, treated or extracted from water.
How is demand evolving?
We might think that demand in developed countries would remain stable, or even decline, due to improved productivity, greater environmental awareness, advances in management and reduced waste. But in reality, demand is increasing in all regions of the world – often in parallel with climate change. Irrigation for agriculture remains inefficient in emerging countries. As a precious commodity (we can’t survive without it) and in a global context of crisis in purchasing power and rising prices, water is also subject to price fluctuations.
Revenue growth ranges from 6-15% per year, depending on market type and region.
Pour quelle raison la demande augmente-t-elle aussi dans nos contrées?
Water demand is highly correlated with GDP. Worldwide, industry is a major water consumer and a key factor in economic growth. A growing company automatically sees its needs increase, but its water requirements include quality standards that are also evolving, and which place ever greater emphasis on optimizing consumption as well as on what the company discharges into the environment.
How do you approach water as an investment theme?
We hold a series of cyclical stocks focused on efficient water management and treatment, to reduce water consumption and make operations more profitable. This segment includes a “consumer” pocket, notably suppliers of water-efficient bathroom equipment. We also have companies that test water quality, others that manage waste, some that control water pollution from urban and industrial water networks, oceans and rivers, regulated water suppliers with a monopoly, and a variety of technology companies active in water treatment. We also invest in manufacturers of water infrastructure for projects of all sizes – some of which could benefit from US federal funding. The portfolio also includes suppliers of technologies for industrial and other uses, such as filtering and circulating water in factories, or optimizing agricultural irrigation. Agriculture consumes 70% of the world’s freshwater resources.
Does the changing regulatory framework offer specific new opportunities?
In addition to opportunities linked to the “Internet of Things”, water network systems, flow management and automation, as well as consultancy services stimulated by government programs and opportunities linked to climate change, the tightening of regulations governing water quality represents a really interesting opportunity. Particularly if we think of the forthcoming regulations on PFAS – or “forever chemicals”, a family of carcinogenic substances that do not degrade naturally in the environment. The latter should represent a multi-billion-dollar market opportunity.
Do these different corporate styles constitute a diversified portfolio, resilient to market downturns?
Although the fund has a cyclical bias, due to high value-added consumer products, its beta remains well below one: it is subject to market ups and downs, but to a lesser extent than the equity market.
How does the theme reflect the global economy?
These are industrial companies or water suppliers, often little known to the general public. There are also representatives from the healthcare and materials sectors. Compared with an ACWI-type global index, the theme does not include any companies active in energy or finance, but does include some companies domiciled in emerging countries.
What are the expected returns of the fund’s sub-themes?
Revenue growth lies within a broad range of 6-15% per annum, depending on market type and region. The growth rate of a company offering, for example, domestic water treatment and purification systems will be relatively mature in the USA, but growing rapidly in China.
Water is a key element in sustainable economic development. What role does it play?
By assigning it an economic value, we focus on its use, protection and distribution when it is scarce. Sustainable economic development aims to improve human well-being and reduce inequalities over the long term, while not exposing future generations to major environmental risks and ecological shortages. It is therefore clear that protecting water resources, limiting biodiversity loss and enabling water-based economic activity and prosperity are two sides of the same coin. If water is essential to industrial growth and production, it is vital to have a comprehensive understanding of the socio-economic importance of water and its availability to facilitate agriculture, sanitation and economic activity – and the technologies and services provided by the companies we invest in play a vital role in this regard.
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Source: Allnews| 20 Jul 2023 | Salima Barragan.
Simon Gottelier, Senior Portfolio Manager specializing in strategy
With 20 years’ experience in the industry, Simon is co-manager of the Thematics Asset Management Water fund. He is also co-founder of Thematics Asset Management. Prior to founding the company, he was co-manager of Pictet Asset Management’s Water Fund. He joined Pictet in January 2016. Simon began his career as an investment banker at Rothschild and Deutsche Bank in London, before gaining experience in the UK regulated water markets at Veolia Water UK.
Thematics Asset Management is an investor dedicated to innovative thematic strategies. Its teams of analysts and managers specialize in fundamental research and bottom-up strategies. Managers are able to analyze companies across the value chain of their theme, and focus on building global, non-benchmarked and socially responsible portfolios.