Water and Waste – a Dual Investment Opportunity
May 5, 2022
Hubbis was delighted to co-host a presentation to selected prominent decision-makers from the wealth management industry in Asia that focused on water and water waste management. Our co-hosts J O Hambro Capital Management and Regnan, were represented by Bertrand Lecourt, Senior Fund Manager and Head of Thematic Investments Strategies and by Saurabh Sharma, Co-Fund Manager at J O Hambro Capital Management.
A Hubbis Thought Leadership Event - Co-Hosted with J O Hambro Capital Management and Regnan
Setting the Scene
Water is a life force. It is an utterly precious, yet remarkably underappreciated and undervalued resource. It is used in nearly all forms of economic activity including food and energy production, industrial manufacturing, textiles and materials extraction. Put simply there is no life and no economy without water and no sustainable economy without waste management.
The Regnan Sustainable Water and Waste Strategy, managed by Bertrand and Saurabh, is promoted as combining some of the best opportunities around water and addresses issues and opportunities around the sustainable economy through efficient waste management.
The strategy has been formulated to identify water and waste value chains with the aim of generating long-term capital growth with enhanced active management, combining defensive and growth stocks. It is a high conviction strategy with unique characteristics and extremely low overlap with global equity portfolios.
Bertrand Lecourt is Senior Fund Manager and Head of Thematic Investment Strategies. He presented to our hand-picked delegates, all private bank gatekeepers and senior wealth management professionals in Asia.
Bertrand was until April 2021 at Fidelity International, where he launched and managed the Fidelity Funds - Sustainable Water & Waste Fund. Prior to joining Fidelity International in 2018, Bertrand was a portfolio manager at Polar Capital and the founder and CIO of Aquilys Investment Management. Before moving to the buyside, Bertrand was Head of Equity Research in France at Deutsche Bank and a utilities analyst at Dresdner Kleinwort Benson and Goldman Sachs.
He holds an MSc in International Finance from HEC School of Management, France, an MSc in Money, Banking and Finance from Birmingham University, UK, and a DEA in Monetary Economics from Orleans University, France.
Opening words from Andrew Ang, Head of Distribution at JO Hambro Capital Management in Asia, based in Singapore:
I am delighted to welcome you here today to hear from Bertrand Lecourt, who is based in our London office. Regnan is an affiliate of the JO Hambro Group, and represents our responsible investment mandates. Regnan started operations in 1996 as an academic arm of Monash University in Australia, and since then has worked extensively in ESG work, providing advice and insights to companies and asset owners as well as asset managers.
The Regnan Sustainable Water and Waste fund is actually our second Regnan fund. The first one was a Global Equity Impact Fund that was launched the year before. Water and Waste was launched late last year, and is run by Bertrand and Saurabh Sharma. Both of them joined us from Fidelity, where they designed and managed the same strategy. Most of our peers’ funds are water only, so Bertrand will argue the case why waste management should be included.
Regnan funds are very similar to JO Hambro funds, in the sense that we aim to deliver alpha with high conviction, and all the funds are capacity constrained.
Selected Key Observations & Insights from Bertrand Lecourt:
It makes good economic sense and also fits the drive to sustainability to focus on an interesting thematic such as water
Bertrand explained that water investments offer robust returns and had delivered “great performance” over the last 10 years. He told invitees that the opportunity for himself and Saurabh to move to Regnan was too good to turn down, as it presented them with a significant opportunity to optimally combine sustainable fundamental research with the right types of portfolio management and corporate environment they had sought.
In less than one year here, we've launched two structures, one in the UK and one offshore. We make investment decisions together, and we conduct all our research any analysis and due diligence together.”
They invest in companies globally that are providing solutions to the water and waste management challenges. They span anything from regulated utility type operators to equipment providers, engineering, water and waste management related technology companies. They focus on the water delivery side across the value chain starting from pump and valve manufacturers, water network operators, water treatment and recycling companies. And similarly on the waste side, they select from companies in collection, treatment, transportation, specialised waste companies, each with their own unique fundamentals.
The combination of water and waste in a single thematic is both logical and compelling
Bertrand explained that the concept is not to invest in utilities, which represent less than 10% of investments. The focus is on water, combined with waste management, and the spectrum is global, any companies anywhere providing services and equipment related to water and waste.
He said these opportunities represent a defensive growth story that over the last 20 years have been outperforming the MSCI AC World NR index by around 3% to 4% per year, and even better than that over the past decade.
The beta they curate is typically considerably below 1, and some 80% of the roughly 35-50 stocks they invest in are not covered by the big banks and don’t feature in mainstream indices.
Rotation is modest at around 30% of the typical portfolio. The balance is roughly 55% water, 45% waste, with that element increasing in size each year. Their investment approach is determined by bottom-up analysis.
Investing in water and water management can encapsulate many positive attributes aligned to ESG
They focus on companies that are responsible and sustainable in terms of development and that are well aligned with ESG investment principles, which are increasingly popular with investors around the world.
While geopolitics, economies and financial conditions might vacillate, the world of water remains more constant
One way to get through all the noise around us is to look at what never changes,” Bertrand observed. “For our lives, health and commerce, we all need water, and we all need to manage our waste efficiently. This has been true for time immemorial. The only difference is the rapidly increasing urbanisation over the centuries, a process that has accelerated markedly in recent decades.
As that happens, consumption rises all the time. And that creates more waste, which in turn places more pressure on infrastructure, with massive amounts needed to keep older infrastructure simply operating properly and in newer economies and cities vast new infrastructure required.
Wastewater infrastructure is lagging new water infrastructure, regulation is encouraging, and water usage keeps growing apace
Bertrand reported that wastewater infrastructure lags well behind, especially in the immensely populous emerging economies. In India, for example, c. 60% of the country’s waste is not even properly collected.
Regulation is another very good element of this thematic’s story. Activity in the sector tends to licensed nationally and locally, but with a built-in return on capital to encourage investment.
And water needs span everything from agriculture, horticulture, to taking showers to washing clothes to making coffee to industrial processes, and so on and so forth.
As water usage expands apace, the price of supply and waste keep rising
Bertrand explained that this is not only a volume story, but also a price story. The richer any place becomes, the more they can and do pay for water. China and India are still lagging in cost versus some countries like Germany or the US, but typically, it's around c. USD60 per month for a family of four, which is really not so much, especially compared with rapidly rising energy costs.
Investment targets comprise any companies associated with any element of the capturing, delivery, and then waste management of water
Bertrand explained that they select target companies from the truly vast universe of water, from source to waste treatment, and everything in between. This allows for a highly diversified portfolio. And as cities and economies become wealthier, they invest more in solid waste apart from wastewater, which is adding further momentum to the story.
To summarise, more and more people are moving to cities, they are getting richer, consuming more, there is more pressure on water delivery and water waste management infrastructure, and the same is true in the worlds of agriculture and industry, which are the biggest consumers of the world’s water.
The investible universe of target companies represents a total value pool of around USD2.5 trillion
The investible universe comprises around USD2.5 trillion of companies to invest in across more than 350 stocks. And he said that the selected universe of companies was growing all the time and becoming increasingly global. Capital market IPO activity and M&A activity were both increasing year on year. As the companies increase in size, there is greater liquidity.
The universe of target companies from which to choose also lends itself to ESG-centricity, with ESG metrics and analysis delivered to them both from external sources and from within, through Regnan’s own ESG experts.
There is great ‘purity’ of investment exposure to water and water waste
The companies that they focus on are very ‘pure’ in terms of their own exposure to this sector. Bertrand reported that their selections at portfolio level are roughly 91% ‘pure’ water on a weighted average basis.
Once selected, there are several key parameters, including of course financial performance, quality, stability and longevity, ESG criteria, the corporate outlook and, naturally, a significant set of valuation metrics.
The final cut comes down to 35-50 names, and currently around 45, he reported.
We have a blended approach. What we saw earlier this year is that a lot of big companies weighted in ETFs in this field were over-bought, and then the January sell-off pulled them down. However, we outperformed peers, as we are blended and balanced. That is the key to our capacity to generate alpha. And because we have a lot of upside in terms of earnings, valuations are not too demanding at all. Moreover, coming out of the pandemic gradually, there will be a new infrastructure push globally, and that will be very beneficial to this thematic.
The water and wastewater sector offers significant portfolio diversification and de-correlation potential
Bertrand also observed that this sector is not one that most investors own, as they tend to focus mostly on the giants from the worlds of tech, pharma, consumer, industrials, financials, energy, and so forth.
We are not what most investors have in their portfolio. And we are macro agnostic; we are not taking big relative positions on the US versus China versus Europe.
And come higher energy costs or lower costs, and across all geographies, the macro risks are minimal, as needs for water and waste management keep rising, and governments the world over must ensure supplies and positive outcomes at both ends of the spectrum, delivery and waste management.
Their universe of target companies does not include any behemoths. There are no ‘Googles’ or ‘Amazons or ‘Apples’ of the water and waste sectors. If everything stopped with supply chain issues, these companies are very local and do their job and they're very resilient, which is very important to remember. We are diversified and blended as well.
Effectively, investors are hedging the fact that this new world ahead will cost everyone more. Your water bill will go up; your waste bill will go up.
Despite the sector’s diversity, resilience and potential for growth, valuations tend to be modest, with share prices typically around 15x annual free cash flow for a perpetual thematic.
Closing and summary comments:
To summarise, the world has become more complex and much harder to predict. If you invest in water and waste, you look at a long-term investment theme. Water and waste have been there for thousands of years and will endure for millennia to come. There is no life or economy without water and no sustainable economy without waste management.
Both water and waste have outperformed the broader market in the past 20 years. And in our opinion, the high visibility of earnings and cash flows is what makes them interesting investment opportunities. We like to describe them as defensive growth opportunities.
We have identified five long term drivers for water and waste.
The first one is population growth and urbanisation, in fact, it is just the concentration of people. Since 2011, it's the first time in human history, and more than 50% of the people now live in cities, it will be 70% by 2050.
And when you move to a city, you become wealthier and you consume more, which is the second driver – consumption. Everything you consume is water, to total water footprint close to 10,000 litres per day for a city-dweller. And everything you consume becomes waste in a few years.
The third driver is the infrastructure gap, as you need to develop your infrastructure in water to be sure that you have no leakage, which is a problem in developed countries at the moment, but also to develop new infrastructure for new cities in developing markets. But waste is also a problem and infrastructure is still not yet there. Some 50% of the waste is not collected on a global level; you need to at least collect it and treat it properly which leads to the fourth driver, which is regulation.
You need to make sure that we can have a sustainable economy. Regulation provides new pockets of growth in terms of setting standard for quality of water or a way to deal with waste. And we can invest in companies which have these challenges ahead of them.
The fifth driver is scarcity of resources. There is a lot of water in the world, but you need to have access to it, transport it and clean it.
We are at a critical point in history, where resources and population growth are at a crossroads. With ESG investments, a lot of focus till now has been around CO2 but we believe that water and waste is at the heart of sustainability. And with our investments, we are not only looking to generate returns, but we also want to create awareness around water and waste challenges.
THIS DOCUMENT IS FOR PROFESSIONAL INVESTORS ONLY. IT SHOULD NOT BE CIRCULATED TO OR RELIED UPON BY RETAIL INVESTORS.
Issued and approved in the UK by J O Hambro Capital Management Limited (“JOHCML”) which is authorised and regulated by the Financial Conduct Authority. Registered office: Level 3, 1 St James’s Market, London SW1Y 4AH.
Regnan is a standalone responsible investment business division of Pendal Group Limited (Pendal). Pendal is an Australian-listed investment manager and owner of the J O Hambro Capital Management Group. Regnan’s focus is on delivering innovative solutions for sustainable and impact investment, leaning on over 20 years of experience at the frontier of responsible investment. “Regnan” is a registered trademark of Pendal.
The Regnan business consists of two distinct business lines. The investment management business is based in the United Kingdom and sits within J O Hambro Capital Management Limited, which is authorised and regulated by the Financial Conduct Authority and is registered as an investment adviser with the SEC. “Regnan” is a registered as a trading name of J O Hambro Capital Management Limited. The Regnan Insight and Advisory Centre of Pendal Institutional Limited is based in Australia and has a long history of providing engagement and advisory services on environmental, social and governance issues. While the investment management teams will often draw on services from and collaborate with the Regnan Centre team, they remain independent of the Regnan Centre team and are solely responsible for investment management.
The distribution of this document in jurisdictions other than those referred to above may be restricted by law (“Restricted Jurisdictions”); therefore, this document is not intended for distribution in any Restricted Jurisdiction and should not be passed on or copied to any person in such a jurisdiction. No person in any Restricted Jurisdiction should rely on this document and persons into whose possession this document comes who are in a Restricted Jurisdiction should inform themselves about and observe any such restrictions. Any such distribution could result in a violation of the law of such jurisdictions.
This report, including any expression of opinion, is for information purposes only and is given on the understanding that it is not a recommendation and is not to be published or otherwise made available to any person other than the party to whom it is provided. No representation or warranty, express or implied, is made or given by or on behalf of JOHCM or any other person as to the accuracy or completeness of the information or opinions contained in this document, and no responsibility or liability is accepted for any such information or opinions (but so that nothing in this paragraph shall exclude liability for any representation or warranty made fraudulently).
 Regnan, Bloomberg. Universe as defined by Regnan. As at 30 April 2021.
 Regnan, Shikpmanov 1999, US Census bureau 2011; IFPRI; McKinsey analysis, 2009
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