The Regnan Sustainable Water and Waste Fund invests in companies that provide solutions to global water- and or waste-related challenges. In September 2024, it passed its third anniversary, having returned 20.7% to investors since its inception. It is managed by Bertrand Lecourt, senior fund manager, and Saurabh Sharma, fund manager.
Rob Kingsbury spoke to Saurabh Sharma about how the theme of the fund is rooted in sustainability and why paraplanners and advisers should reconnect with sustainable funds in general.
(L-r)Photo: Bertrand-Lecourt-and-Saurabh-Sharma
Rob Kingsbury: Why water, why waste and why together in your fund?
Saurabh Sharma: Water and waste is actually a story about people. When humans first started to form cities, the first thing that they did was to find a water body and then build a city near it. The second thing was to build a good sanitation system.
Those basic principles have not changed for thousands of years, and even if, as the big tech like to tell us, we are going to be living in the Metaverse in 10 years’ time, we’ll still need water and waste management services. They are core to our existence.
There are five structural long-term drivers for both water and waste.
The first of them is urbanisation. In 2011 for the first time in human history, more than 50% of the global population started to live in cities. This number is expected to increase to around 70% by 2050.
The second is consumption intensity. As we move to cities we get richer, we start to use more water. Sometimes we don’t realise how much water we are using. If we think about our water footprint, a simple cup of coffee takes around 140 litres of water, while a cotton shirt takes around 2,500 litres of water, because agriculture is a very water intensive industry.
Similarly as we get richer, we also start to generate more waste; an average human generates around 500kg of municipal waste every year.
The third driver is infrastructure pressure. As fund managers, we think about it from both an emerging markets and developed markets perspective. In the emerging markets, infrastructure, both on the water side and on the waste side, doesn’t exist right now. So we’re building new infrastructure. And in the developed world, some of the infrastructure, such as in the UK, is getting old. We need to maintain that infrastructure to deal with the population growth that we’ve seen around the world.
The fourth driver is regulation needs and health needs. We need good water to keep ourselves healthy. Similarly with waste management as well, we need to manage our waste properly to keep the society healthy.
The fifth driver is resource scarcity. Water is a scarce resource – 70% of our planet is water, yet only 2.5% is drinkable water, and only half of that is accessible to us. So we need to preserve our water and invest in water security.
Similarly, with waste management as well, there’s only so much landfill because we’re already depleting our arable or agricultural land by building out cities.
These are the five long-term structural drivers. It doesn’t matter what the Fed decides to do or what the BoE of the ECB decides to do in terms of interest rates, these structural drivers are here to stay.
Rob Kingsbury: What type of areas are you invested in under these themes?
Saurabh Sharma: When we think about the investment opportunities, we always refer back to the value chain of water and waste.
On the water side, for example, are pump and valve manufacturers, water treatment companies, storage companies, network operators, and finally, wastewater treatment and recycling companies. There’s an entire value chain on the water side.
Similarly, on the waste side as well. You start with collection and transportation of waste, then specialised waste management companies, such as those undertaking hazardous waste management, such as waste that is coming out of hospitals.
From a sustainability perspective, waste management, especially in urban areas, can have a significant economic cost for many administrations, especially in low income countries.
Dealing with waste can be one of the largest budget elements for municipal corporations – it can be nearly 20% of a municipal budget on average. Solid waste management alone, typically accounts for more than 10% of the municipal budget in middle income economies and about 4% in high income economies.
If we do not collect and treat this waste properly, it can have an impact on the health of people living in the localities, both in the emerging markets and in the developed world.
The cost of maintaining hygiene by managing our waste properly is much less than the cost that we would have to incur if we did not manage that waste properly.
But because these are essential parts of our daily lives, we almost forget the importance of them. We take these services for granted, but they are important for our everyday lives.
The motive of the fund is that there’s no economy without water, but there’s no sustainable economy without waste management. Both of these two things need to be provided to sustain life.
Rob Kingsbury: You talk about having a disciplined investment approach when you’re looking at these areas. Would you go into more detail on that please.
Saurabh Sharma: There are a few things that are important for us. Firstly, we think about the water theme and waste theme together. We don’t put a set percentage of the portfolio into water stocks, or a certain percentage into waste stocks. We think of them as a combined universe.
The typical allocation between water and waste over the fund’s history has been around 60% water stocks and 40% waste stocks within the portfolio. But that is not set and can evolve with time, depending on where we find opportunities.
Where we feel we are differentiated within our peer group, especially on the water side, is in thematic purity. By that I mean insisting that a percentage of the revenue being generated by a company’s activities is directly linked to water solutions or waste management solutions.
At a stock level, at least 40% of a company’s revenue should be coming from either water and/or waste – if that percentage of revenue is not there, we do not buy those stocks.
Then at a portfolio level, at least 70% of the portfolio’s revenue should be coming from both waste and water combined. And that means, on a weighted average basis, when we have those two thresholds, most of our stocks will be 100% pure to the theme.
From their sustainability perspective, apart from the fundamental work that we do, which is critical to the process, we also undertake a sustainable value assessment. We look at all of our companies on environmental factors, social factors and governance factors to come up with a sustainability score.
And we strongly believe that you cannot be falling in love with your companies. This is especially so when managing a thematic strategy. We are very valuation disciplined. If something is looking expensive and we see a competitor who might be trading at a cheaper multiple, and the investment thesis makes sense, we don’t shy away from divesting from one name and buying another.
Being disciplined within the investment process, looking at the multiples, looking at the quality of the companies, looking at the balance sheet strength right now, especially looking at the pricing power of companies in period of inflation, that is how we believe we have generated these returns our investors.
In the context of the macro picture, since we launched in 2021, volatility has been the one constant in the market. We have seen persistent inflation, rising interest rates, geopolitical tensions, wars, and massive supply chain disruptions. We have seen massive sector rotations within the market, which have not been limited to the technology sector. And most importantly, we’ve seen the emergence of generative AI.
Through this period, we have been consistent in our process, challenging ourselves within our process and in terms of what stocks we should be owning, in a disciplined investment process. That’s how we have generated good absolute returns for our investors, especially amongst our peer group on the water side, where we are in the top decile.
Another point is where the fund can sit within an investor’s portfolio. It can act as a useful diversifier within global equity allocation and also within global sustainable allocation.
In a typical global benchmark, you’ll have sectors like technology, financials, healthcare, which combined can make up a large proportion of global equity allocation. Within our portfolio, we have almost 0% allocation to those sectors combined. Our structural exposure is always going to be within industrials and utilities which makes the fund a very good diversifier within these allocations.
Rob Kingsbury: In our recent parameters survey, paraplanners noted a fall-off in interest among investors and their advisers in ESG/sustainable funds. Why do you think financial advisers should reconnect with sustainable funds in general?
Saurabh Sharma: When you think about sustainable portfolios, a lot of the focus has been around Co2 intensity. And lot of the portfolios which were not initially sustainable portfolios became so because as you buy technology, financials, and renewable energy companies etc, you’ve already bought your C02 intensity down, and you’ve created a sustainable portfolio.
But what these portfolios were doing was buying growth sectors. So, when in 2022 we saw a sell-off in growth stocks, especially technology and renewable energy stocks, sustainable fund performance dropped. Investors understandably became worried about investing in sustainable funds.
In the long run, to be sustainable your fundamentals have to be sustainable as well. Advisers or individual investors need to be able to understand what the fund is trying to achieve. So, the objectives need to be clearly laid out for investors.
That’s why, within our portfolio, we have clearly stated objectives. We’re investing in companies that are providing solutions to the water and waste challenges around the world and that is our area of expertise. We have clearly mapped the entire universe. We stay true to the investment process in terms of the thematics. We stay true to the sustainability.
In terms of the longer term objectives, we are providing the benefit of being a global diversifier to allocation and then, most importantly, we’re also here to generate returns for our investors. Because eventually, if investors don’t see those returns that are coming through for them, they’re going to go look for something else that is in the market which is providing them with the returns they require.
That’s why looking at returns is equally as important as meeting your sustainable objective. We’re not looking to add a stock to the portfolio just because it’s a good sustainable story. We’re looking for companies which can add value to our investors, both from a fundamental and a sustainable perspective. And that is what we believe investors should be looking at when allocating towards sustainable allocation.
Also, the universe in which we are invested is getting bigger year on year. In 1990, there were around 30-40 water and waste stocks to invest in. Now our universe is around 350 stocks, with a total investable market cap of more than 2 trillion US dollars, and the average market cap of these stocks is now around 6 billion US dollars. New companies are coming on all the time. There have been IPOs that have happened in Canada, Brazil, India, Poland, both on the water side and the waste side.
We’ve proven with our track record that sustainable fund can deliver positive returns even in challenging markets. Making an allocation to a sustainable fund can give advisers and their clients, exposure to strong fundamentals, steady returns, and useful diversification in volatile markets.
