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Henderson: Investors ignore water scarcity at their peril

10 April 2017

Henderson Global Investors managers Hamish Chamberlayne and Nick Anderson explain the potential solutions to water scarcity and the investment implications.

By Rob Langston,

News editor, FE Trustnet

With water crises identified as the biggest risk facing the world over the next decade by the World Economic Forum, a number of solutions have been mooted to solve the problem of water scarcity.

Hamish Chamberlayne and Nick Anderson, managers of the global sustainable equity strategy at Henderson Global Investors, note that water is used across all business sector, with demand for freshwater coming under increased pressures.

They noted: “Water appears to be ubiquitous, until one realises all of these industries are almost entirely dependent on the same type of water – freshwater, as opposed to ocean water – in direct competition with human consumption.”

Performance of MSCI World Water Utilities vs main index over 5yrs


Source: FE Analytics

The pair say almost 50 countries have been defined as being water stressed, highlighting Yemen, Pakistan, Iran, Mexico and Saudi Arabia among those at risk of running out of water.

Stocks of freshwater have also come under pressure from the effects of climate change, say Chamberlayne and Anderson, who explain that a warmer climate is able to hold more vapour.

“Too much water vapour in the air triggers extreme weather events, observable in the increasing frequency and severity of floods and hurricanes worldwide, as well as prolonged periods of drought in some geographies,” the managers said.

Water utilities have performed strongly in recent years, as shown by the chart above, although this is likely to represent some of the rotation by investors into ‘bond proxies’, so-called for their stable income, low growth and low volatility.

Yet, investors might be able to play a role in helping to solve some of the issues affecting the water crisis and benefit from firms innovating to tackle the ongoing challenges.

“There are plenty of ways to invest in water as a theme, with many listed companies globally that operate in the fields of water management, treatment, infrastructure and supply,” said the managers.

“This isn’t just about more pumps and pipes, reservoirs and dams. New techniques and technologies offer hope across the spectrum of water demand and supply, and exciting innovations include solar-powered desalination, filtration using nanotechnology, smart monitoring, and precision agriculture.”

However, Chamberlayne and Anderson warn that exposure to water risk should be considered across all stocks held in a portfolio.

Water dependency, security of the supply and efforts to measure, manage and mitigate water risks should all be considered, according to the managers.

“Alongside physical water risk, there are growing reputational and regulatory risks, as public water supplies are safeguarded, and as policies on climate change and environmental pollution are enacted,” they said.

“Over the past few years companies have reported increased impacts to their bottom line from water-related causes, such as groundwater pollution and effluents not meeting regulations.”

One example of a stock held within the pair’s global care strategy is New York Stock Exchange-listed ‘pure-play’ firm Xylem.

“With a corporate mission statement of ‘Let’s Solve Water’ the firm works with corporate, municipal and governmental clients across a broad spectrum of industries, designing and manufacturing water solutions across every part of the water life cycle,” said the pair.

“Their four operations units comprise: water and wastewater treatment solutions, analytical instruments, controllers and pumps & accessories.”

The managers highlighted the firm’s acquisition last year of smart meter and data analytics firm Sensus, which they believe has the potential to generate “significant additional revenues” for the company as demand grows for greater water efficiency and conservation services.

“We believe the effects of water scarcity are already in train, and that investors ignore the warning signs at their peril,” they added.

The pair’s £533.7m Henderson Global Care Growth fund has returned 98.69 per cent over the past five years, compared with a 76.73 per cent gain for the average IA Global sector fund, although it has underperformed the MSCI World benchmark’s 102.52 per cent return.

Performance of fund vs sector & benchmark over 5yrs


Source: FE Analytics

The fund aims to provide long-term capital growth and increasing income through investing in equities, convertible bonds and fixed income world-wide. However, the fund only invests in firms “whose products and practices enhance the environment and life of the community”.

Anderson has co-managed the fund since 2012, while Chamberlayne joined in 2013, both joined the asset manager from Gartmore. The fund has a yield of 1.40 per cent and has an ongoing charge figure (OCF) of 0.85 per cent.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.