Water and waste are often thought of as very boring businesses but they are essential building blocks for a sustainable economy, says Bertrand LeCourt, senior fund manager, Regnan Sustainable Water and Waste Fund.
There is a saying that if you stop water it is over, and if you don’t deal with waste then it is over as well. The two can often be thought of as very boring businesses but they are essential building blocks for the economy and when it comes to water and waste, I say boring is beautiful.
There is a compounding story here; over the last 20 years, these businesses have been experiencing earnings growth of 10 to 12% per year and they have a 2 to 3% dividend, and yet, this is not a volume story. This 13% to 15% total return per year over a three to five year average is really being driven by the fact that prices are rising.
Let’s say for example, you use a service that takes your bins and the price of those bins comes down 10% because the economy is slowing down, the price of the service is still the same, perhaps even more expensive. In a high-inflation economy, water and waste investments are good bets.”
We can tilt the allocations within the fund to take advantage of the changing environment.
If you look at the water and waste universe we invest in all aspects of the value chain. Utilities companies only make up 10% of the industry, meaning the other 80% is made up of the companies supplying the infrastructure e.g water pumps and filtration which typically have strong balance sheets. We have a really unique ability at Regnan to map all 350 companies that operate in the sector, making it easy to compare companies and adapt the portfolio when we see opportunities.
The US has invested a large sum of $550 billion into infrastructure, a quarter of which is allocated to the water and waste industry. Whenever you build, say, a road, you also need a storm management system on the side to collect all of the dirty water. The point being that large infrastructure products create byproducts that need to be managed, therefore investing in the companies and products that help manage these byproducts can be advantageous.
Climate has a big impact on the waste and water industry. There’s a lot more awareness now, particularly of flooding for example, from heavy storms. People are feeling the need to improve the infrastructure. But no two regions are built equally. Southern Europe, for example, experiences quite a lot of drought in comparison to other regions which experience far more flooding. In situations of drought you need better adaptations e.g higher levels of reserve water and a tighter control on usage. When it comes to flooding, you might need a full drainage system instead. You will always fall on one side of this scale and that’s where the fund is strong, it caters to both ends of the spectrum in that sense.
Lastly, let’s look at cities where 90% of water is filtered into the ground but the remaining 10% requires draining. This phenomenon means that cities increasingly need to adapt their capacity to drain this water via companies such as Advanced Drainage Systems who provide recycled, flexible PVC pipes which are far more effective at ensuring water is drained efficiently.
We are still in the post covid crisis environment and the mandatory policy to accommodate this is still having its impact. So going forward, the ability to invest into this adaptation will continue to increase in its importance. Essentially, even if interest rates are high or the environment is inflationary, there are fantastic opportunities to invest in these water and waste companies which are sound financially.
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