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The risk of water scarcity in the world inflates the profitability of thematic funds

Date: March 4, 2024 Time: 05:20:41

The rains in recent days in some regions of Europe, especially in Italy, do not prevent drought alerts from continuing to be present in the Old Continent. April has been the fourth hottest month worldwide since there are records, a situation that targets water scarcity as a first-order threat. As the voices about the consequences of climate change grow, this resource becomes an increasingly coveted asset that does not go unnoticed in the financial markets.

The increase in the population together with the accelerated climate risk have led to the need to seek technological solutions to achieve more efficient water management, a fact that reinforces the attractiveness of companies dedicated to its sanitation for potable use or those focused on improving the existing infrastructures. “There are opportunities in those companies that lead the water sector by minimizing its use or reusing it to the extent possible, which would reduce costs,” says Abdón’s manager, Sarah Norris.

Water has become a megatrend that has aroused the interest of managers and investors in recent years. Despite the fact that this ‘boom’ for the ‘blue gold’ ran into a big bump in 2022, which will go down in history for being one of the worst exercises for equities and fixed income in decades, as well as for the climate component, as it is the sixth warmest year since 1880, most of the funds analyzed show double-digit three-year returns.

Among them is Pictet Water, which manages assets worth 8,000 million dollars and offers a three-year annualized return of 11.3% and 2.4% so far in 2023 through a portfolio that is committed to services associated with water. The vehicle was promoted in 2000 and currently only accepts subscription orders from investors already registered and with a limit, although redemptions are not affected, Pictet, the manager in charge of the fund, specifies.

BNP Paribas Aqua I as well as Natixis International Funds I (+4.7% since the start of the year and 14% annualized over 36 months) -which manages 392 million-. Also noteworthy are Allianz Global Water AT in euros (3.1% accumulated for the year and 10.8% annualized over three years) with 994 million in assets and RobecoSAM Sustainable Water Equities D (4.4% since the beginning of the year and 13.4% annualized over three years), which manages more than 3,400 million.

Predilection for the US and UK

These vehicles have in common their predilection for American and British sector companies, some of them sharing significant positions in companies such as Veolia, which appreciated more than 17.7% in the year and offset the positions of others such as American Water Works, which fell more of 7.2% and also easily beat the gains of the category in which they are framed. Some returns that contrast with the evolution of the S&P Global Water Index. This index, which brings together the 50 companies related to public water services and ranges from infrastructure to equipment, among others, posts earnings so far this year slightly above 5.6%, after suffering a blow of 22 % last year, with data at the close of the markets last Friday.

To put it in context, the S&P500 has registered a rise of slightly less than 9.2% since January 2. What’s more, analysts are skeptical and considering that the Water Index is trading above what it should. The ‘Bloomberg’ consensus believes that its potential is in the range of 4,570 points, 18% below the levels at which it is currently. Under the mantra that past returns do not guarantee future returns, the question arises as to whether this investment, which some analysts see as a ‘winning option’, has come to a halt and is losing traction.

Investors and responsible approach

The water market moves around 1,100 million dollars, according to data provided by Pictet and covers around 300,000 companies related to the industry, of which only 850 are represented on the stock exchanges. Of these, 360 are significantly exposed to this area. Within these figures, the Swiss manager highlights that SMEs are the ones that obtained a higher percentage of profits and sales. “It is essential that investors get involved through a responsible approach. On the risk side, this means, for example, refusing to invest in mining operations that operate in areas of high water stress. On the opportunity side, this means investing in companies that are at the forefront of optimal water use in the agricultural sector. Agriculture accounts for 70% of global freshwater withdrawal,” says Chief Investment Officer at Edmond de Rothschild AM, Jean-Philippe Desmartin.

The experts focus on the water value chain, which is where companies can consolidate competitive advantages as a result of digitization. In this sense, the UN anticipates that there is a financing deficit of 114,000 million to guarantee the availability of water and its management worldwide, a situation in which Wellington Management emphasizes the “crucial role” that investors can play. converters and companies to fill these gaps. Although the real problem of water is in the underdeveloped or developing countries, the developed economies are not immune to this problem, which can worsen if the lack of rainfall worsens.

* This website provides news content gathered from various internet sources. It is crucial to understand that we are not responsible for the accuracy, completeness, or reliability of the information presented Read More

Puck Henry
Puck Henry
Puck Henry is an editor for ePrimefeed covering all types of news.

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