Today is UN World Water day (March 22), an annual event that the United Nations has used since 1993 to focus the world’s attention on the sustainable use of water. It has had much success in creating awareness around the challenges of water scarcity and the essential need for solutions. In recent years there has also been a growing awareness of the opportunity to earn consistent long term returns while having a positive impact from investment in companies delivering those solutions. 2013 has been designated as the United Nations International Year of Water Cooperation, recognizing the many dimensions of solving our global water challenge. Today nearly 800 million people do not have access to clean drinking water and 2.5 billion people lack access to basic sanitation. Water is also essential to our global economy. It has been estimated that unless water provision is adequately addressed, 45% of projected 2050 global GDP (approximately $63 trillion) could be at risk. However, if we creatively deploy more sustainable solutions, $17 trillion in GDP could be preserved, not to mention more importantly, sparing more than 1 billion people the extreme hardship that lack of adequate water will inflict. In order to address these challenges, an estimated $22 trillion investment will be required from 2005 to 2030. For investors, identifying how this capital will be deployed and which companies will best provide the vital solutions provides both the opportunity to impact the critical challenges and achieve strong returns. Bank of America Merrill Lynch estimates that the size of the global market for water solutions is $500 billion today and forecasts that it could grow to $1 trillion by 2020.The investment opportunity lies in capturing both the beta from the water theme and the alpha from selecting the stocks providing the strongest solutions and offering the best opportunity to outperform. Assuring exposure to the beta of the water theme involves precisely defining the theme and making sure that the companies that make up the universe of stocks eligible for investment are sufficiently exposed to the trends driving the need for water solutions. Specialist active management can then add alpha above the returns purely available from the theme by identifying a high conviction portfolio of stocks that are best positioned to outperform. The water opportunity is broader than a single sector, consisting of a collection of niche companies that are involved in some specialized aspect of the provision of water. Their businesses cover a wide range and include water utilities that manage the infrastructure from source to use and back again, to water infrastructure companies that design, produce or construct water infrastructure to niche water technology companies that produce solutions to manage, conserve and assure water quality. Companies across theses three water sectors have diverse return characteristics. Water infrastructure companies tend to be exposed to cyclical and capital spending end markets. Water technology companies tend to be niche high growth companies driven by company specific drivers. On the other hand, low beta, higher-dividend paying regulated water utilities can provide a defensive component during more turbulent markets. This diverse universe of stocks is a main contributor to the ability to deliver long term consistent, less cyclical returns – one of the most compelling reasons to invest in water.
For some investors, the challenge that remains is where to allocate water equities in their portfolio. Water equities are first and foremost global equities delivering a new source of alpha to a global equity allocation in a risk efficient manner. They have a place in a global equity portfolio as a source of long term growth and/or as a part of a satellite allocation in a core satellite approach. Additionally, a closer look at the drivers of growth forwater stocks highlights specific investment characteristics that investors are looking for as liquid components of different alternatives allocations including natural resources, infrastructure and real assets. Trying to find a home for water should not cause investors to miss out on its benefits. Wherever it is allocated, it can have an impact and enhance returns.
Steve Falci, CFA is Head of Strategy Development Sustainable Investment at Kleinwort Benson Investors.
Kleinwort Benson Investors’ latest white paper is titled: Investing in Water: Accessing a Compelling Opportunity