Water: The undervalued liquid asset
Dieter Küffer is a senior portfolio manager responsible for SAM's Sustainable Water Strategy and Sustainable Water Evolution Strategy. Before joining SAM in 2001, he led a team responsible for the management of actively managed equity mandates on behalf of Swiss institutional clients at UBS Asset Management in Zurich.
Zurich-based SAM offers asset management, indexes and private equity. The firm is a part of Robeco, a global asset manager, founded in 1929.
Why is water a particularly important investment for the 21st century?
Environmental and social changes are putting pressure on the availability of clean water. We only have to look this year at what is possibly China's worst drought in more than a century to understand how fragile the system is.
Major long-term trends that support the need to invest in water include population growth, urbanization, ageing water infrastructure, water quality issues and climate change.
Around 4,000 litres of water a day are currently consumed per capita and this is significantly impacting future water supplies. With the global population expected to grow from about 7 billion people to 9 billion by 2050, it is crucial that systems and technology are put in place now to address the problem (see also graph below demonstrating water usage and global population).
Investing in water is not just about utilities -- which other areas/industries are part of your water strategy?
Our investment approach is to invest along the entire water value chain. Utilities account for around 20% of our strategy on a long-term basis, while the rest is mainly comprised of equipment suppliers and service providers to the water industry.
On the equipment side, we invest in suppliers of water pumps, valves and other distribution equipment, as well as water-treatment technology and analysis equipment companies.
In the agriculture sector, which accounts for about 70% of water demand globally, we invest in irrigation technology and water-efficient agriculture companies. Some of the world's most agriculture-intensive countries are in Asia and include China, India, Indonesia, Thailand and Vietnam.
The strategy has outperformed the MSCI World for seven out of nine years since its inception in 2001 and has posted a good overall performance. What are the main reasons behind this?
Not only has our water strategy performed well against the MSCI World, but it has outperformed its peers since inception. The strategy has benefited from the high growth rate of companies in the water industry in general and also from its stock selection within the water universe. More recently, the strategy has profited from investments in Asia, where it has been overweight in the recent years.
Would you briefly outline the investment process of the SAM Sustainable Water strategy?
The process starts with a macro study to find the trends and challenges in the water sector. The next step is the construction of a universe of stocks that will benefit from these macro trends. Then we analyse sustainability criteria and financials. For water utilities, sustainability criteria such as leakage rates are assessed -- the better a company manages leakage rates, the higher the profitability. The financial analysis leads to a discounted cash flow (DCF) model, which also integrates the sustainability criteria. The portfolio manager then selects stocks, taking into account valuation and momentum factors.
What benefits does this strategy offer over comparable ones?
One difference is that we invest in the whole value chain of water, while other strategies tend to focus mainly on utilities. We see higher long-term growth in suppliers and less political risk in such investments, compared to water utilities.
Investors also benefit from the expertise of an experienced, inter-disciplinary research and portfolio management team dedicated to the water theme. The team has a thorough knowledge of water technologies, as well as a real understanding of water companies in Asia.
Given that companies involved in the water industry will often be partly or wholly state-owned -- particularly in Asia -- to what extent does that make it difficult to invest in them?
The water industry is different in each Asian country. In India, for example, water utilities are mostly owned by municipalities. However, there are many listed companies that supply technology and services.
In China, many water utilities are listed in Hong Kong, Shanghai or Shenzhen, although the majority of Chinese water utilities are still government-owned. Our strategy focuses on Hong Kong-listed shares, as capital repatriation from the mainland is challenging for non-Chinese investors.
How many of the companies that the strategy invests in are from the Asia-Pacific region, which countries most notably, and why?
The strategy holds about 22% of its total assets in the Asia-Pacific region. Due to the favourable regulatory environment, we like China-related companies -- most of our Asian investments are in China/Hong Kong (15% of the whole portfolio). The rest is spread among companies in Japan (3%) and South Korea (1.5%), as well as Australia, the Philippines, Singapore and Thailand.
The strategy's AUM stands at around $2.17 billion, a decent level for a relatively specialist/niche strategy such as this. How much have AUM grown in the past year?
The total value has increased by about $650 million in the past year.
Which are the main types of clients that invest in the strategy?
Initially, most investors were private and retail clients, as some of the major international banks put our water strategy on their recommendation list. However, we have seen an increasing number of institutional investors investing in our water strategy in the past 12 to 18 months. The majority of investors are still from Europe, followed by Asian investors.
Looking 20 years into the future, do you think the subject will still be as relevant?
We are convinced that the water investment theme is a long-term trend. Water is a limited resource with no substitute. The good news is that water is renewable -- waste water can be recycled or reclaimed and used again. This is well demonstrated in Singapore, where reclaimed water, called NEWater, can supply up to 30% of its requirements through recycling.
In the past, the water industry has grown about 1.5 percentage points per annum faster than global GDP, and we expect its growth to continue at an above-average rate, especially in Asia (see also graph below demonstrating forecast water capital expenditures in order to meet rising demand).
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