Where the river flows, so too can returns

Written by Hu Aarts on 12th January 2017

By Hubert Aarts, co-manager of the water strategy for Impax Asset Management.

In 2017, we expect water infrastructure investment to continue to rise up the agenda in both developed and emerging markets, as pollution incidents and extreme weather continue to hit the headlines.

Hubert Aarts

Hubert Aarts

Investing in water is often assumed to be narrow and high risk, and principally focused around utilities. Actually, as water touches so many end markets, sectors and regions, the investment opportunity is surprisingly diverse.

Water also proves attractive throughout economic cycles encompassing both defensive and cyclical businesses, an opportunity set with risk characteristics comparable to global equity markets.   

Impax has been researching and investing in listed water companies since 1999, and running a dedicated water strategy since 2008. Over this period, the water universe has grown to approximately 250 companies with a combined market capitalisation of some £655 ($810) billion1.

Increasing water pollution incidents such as the contamination of the water supply in Flint, Michigan (where thousands of children have been exposed to lead contamination), highlight the urgency of upgrading ageing water infrastructure to prevent serious health issues. New infrastructure in rapidly developing countries is also aimed at improving public health. China’s 13th Five Year Plan commits 2 trillion yuan (US$330bn) to tackle water pollution.                              

Water leakage is a major problem in urban areas. Around 15-25% of water is lost every day in the US from pipe leaks. London loses 180 million gallons per day from ageing water infrastructure. Such high levels of wastage during periods of drought and shortages is triggering significant long term capital spending commitments. For example, in the Sao Paolo region in Brazil, the quoted water utility is investing BRL 4.3bn (US$1.3bn) over 10 years in a programme to combat water loss.

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Specialised water equipment suppliers provide interesting investment opportunities further down the value chain (see table below). These specialised solution providers to water supply challenges tend to operate in a relatively narrow competitive landscape and so often have strong pricing power.

As their technologies have applications across multiple sectors and geographies they deliver diversified revenue streams to water portfolios, which have been resilient through the economic cycle.

Evolving landscape of solutions:

Water reuse Treated waste water used to refill depleted aquifers, easing ground water
stress
Leak detection Technological advances in leak detection, less water lost, longer pipe life, lower operating costs
Flow efficiency New disruptive energy efficient pump technologies
Water treatment Water efficient UV disinfection, ozone treatment, and handheld testing devices
Automated metering Improved water management and real time monitoring for leak detection
Desalination Increasingly energy and cost efficient solution in some regions
Data and software Water industry is using big data to map inefficiencies and to develop supply and demand solutions

Water is a compelling multi-decade investment opportunity that we believe will continue to outperform over the longer term.  Our recent paper reviewing the water investment opportunity can be viewed here.