Investors are often disinclined to jump into water investments, viewing them as too basic, too limited and too blah. When water flows from the tap, it’s not top of mind. But the surge of problems compromising water security could make people reconsider.
Although a polluted river and deplorable oversight hastened the water crisis in Flint, Mich., the key culprit of the city’s toxic drinking water, crumbling infrastructure, is a growing national and global concern.
Most of the U.S.’s buried water infrastructure is at least 50 years old, and in some urban areas many water mains have been in use for a century or longer, according to the nonprofit American Water Works Association. The association projected that it would cost at least $1 trillion between 2010 and 2035 to restore buried drinking water infrastructure systems reaching the end of their useful lives and to expand systems for a growing population.
“It’s not just a Flint problem,” says David Richardson, a licensed civil engineer and head of global marketing and client service at Impax Asset Management PLC in New York. Hundreds of U.S. communities are perched atop lead pipes. New Jersey plans to test all its schools for elevated lead levels in drinking water after the discovery of negligence in Newark.
London-headquartered Impax manages approximately $2 billion in water portfolios globally—nearly 40% of its total assets under management. The Flint crisis, expected to spur tougher regulations, is one factor that prompted the money manager to increase its allocation to water infrastructure from 50% to nearly 60% during the first quarter of 2016, says Richardson.
He also notes that more people are starting to connect the dots between climate change and extreme weather events, including the massive flooding in Miami Beach, Fla.; the persistent drought conditions in Southern California; and the storm surge in New York City’s subways during Hurricane Sandy.
The climate change and Flint challenges have made it clear that water infrastructure can no longer be viewed as a cyclical play reserved for good times, says Richardson. “Whether we’re headed for a slowdown or if things will be booming, we feel pretty good about the spending that will go into water infrastructure,” he says. “We feel better about it now than we did at the end of the year.”
He notes that cumulative spending on global water infrastructure is projected to account for $22.6 trillion of the $41 trillion in total infrastructure spending between 2005 and 2030. This runs circles around the projections for power ($9 trillion) and roads and rails ($7.8 trillion). The figures come from Booz Allen Hamilton and other sources.
One big driver will be China’s 13th five-year plan, which sets specific goals for reducing water consumption, improving water quality and expanding wastewater treatment. “Countries around the globe are adopting U.S. clean water standards and spending money to meet those standards,” he says.
Impax invests in companies that sell equipment to large infrastructure projects rather than investing in the projects themselves. “We see that as higher growth with higher margins,” says Richardson. The water portfolio is invested only in public equities—approximately 50 companies—because it’s hard to get diverse exposure through private water investments, he says.
Half its holdings are in U.S.-based companies, and 35% are Europe-based. Yet roughly one-third of the companies’ collective revenues are generated in Asia, one-third in the U.S. and one-third in Europe. “There are more opportunities in Asia than companies to invest in,” he says.
Impax invests in producers of pumps, pipes, valves and other equipment. Some of the equipment is used for desalination, the process of making seawater potable, and for aquifer recharge, which puts treated water back in the ground. Both types of project are close to coming online in California, says Richardson. The technologies are employed globally.
“We also see water testing, which is part of the infrastructure category, as a ripe area for investing,” he says, “because people care about what’s in the water now.”
Impax’s water portfolio has 20% allocations to water treatment (providers of filters and other technology) and water utilities. At the end of 2015, when market volatility was high and water infrastructure was getting expensive, those allocations were each 25%. “Water utilities are very defensive,” says Richardson. “People use the same amount of water whether they’re worried about the stock market or excited about the stock market.”
The Water Life Cycle
Bethesda, Md.-based Calvert Investments has begun looking at water through a wider lens. On April 11, the Calvert Global Water Fund (AUM: $415 million) changed its investment objective and is now tracking the Calvert Global Water Research Index, which was launched in February. Calvert Investment Management is managing the fund, which had been actively managed by a subadvisor before.
“The main driving point was to create a product that took into account the entire water life cycle,” says Chris Madden, one of the fund’s new portfolio managers. This includes everything from withdrawal to use to discharge, he says. The fund “is sort of passively run with a research-based style,” he says, which has enabled it to lower its fees.
The Calvert water index addresses the traditional water segments—utilities, infrastructure and technology—and a fourth segment, “water leaders and innovators,” which “reflects the demand side of the water cycle,” says Jade Huang, a portfolio manager for the Calvert Global Water Fund. “We’re looking at the most water-intensive industries and choosing companies that are really leading their peers in reducing their water use or being more efficient in their processes.”
Each of these segments is weighted at one-quarter of Calvert’s water index, and the U.S. investments represent about half. The companies in the index (approximately 90) must meet Calvert’s “Principles for Responsible Investment,” which involve corporate responsibility and sustainability.
One company in the index, Hong Kong-based China Everbright Water Ltd., builds and upgrades wastewater treatment plants in China. This puts it in the right place to benefit from China’s most recent five-year economic plan, says Huang. U.S.-based Aegion Corp. has a new, less-disruptive way of repairing pipes and pipelines.