2 days ago
Equities opportunities in water and environmental solutions
[GENEVA] While themes such as digital and robotics have been leading the way in financial performance in recent years at Pictet Asset Management (Pictet AM) – a pioneer in thematic equities – the asset manager remains excited by the themes of water and global environmental opportunities.
Pictet AM, which has been investing in water opportunities for 25 years, sees a US$1.4 trillion global water market growing at between 3 to 5 per cent annually, supporting a diversified investment universe.
According to the asset manager, seven megatrends underpin the water theme, namely climate change, resource scarcity, focus on health, environmental quality, urbanisation, economic growth and commercialisation.
Cedric Lecamp, who heads the investment team for the water strategy at Pictet AM, oversees about 10.2 billion euros (S$15.3 billion) in assets under management (AUM).
He sees the water universe as being everything to the water value chain, and focusing on three particular elements – water technologies, water supply and environmental services.
Water technologies can range from water efficient faucets used in a consumer residential setting to monitoring equipment to help analyse water quality and water efficient irrigation systems. Water supply tends to be regulated utilities that operate in natural monopolies, which have defensive characteristics and stable cash flows.
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Environmental services are generally engineering companies. This includes companies that design water and wastewater treatment plants, but also engineering and consulting companies that help industrial users of water map and reduce their water use.
In the water strategy portfolio are around 48 companies, the bulk of which are predominantly in North America. Positions, on average, are held for seven years, added Lecamp.
'We think the best way to offer investors returns in the water universe is to stay with high-quality companies that have high return on invested capital,' he elaborated, noting that these companies tend to be more in the US than the rest of the world.
As for returns generated for share investors in Pictet AM's water strategy, this is about 8.6 per cent per annum in euro terms, mainly driven by share prices appreciation of the listed equities, said Lecamp.
Water reuse is one of four front of mind issues for Lecamp. He sees much untapped potential to address water availability challenges to meet growing needs for municipal drinking water and from industry.
He noted that by 2050, around 50 per cent of global water extraction could be reused, versus around 12 per cent today, as prospects for growth water reuse are being buoyed by technological disruptions and innovations.
Lecamp's other front-of-mind issues are the growing penetration of professional waste management services, closing the water infrastructure spending deficit and the increase in private sector participation to achieve universal coverage of water and wastewater.
For one, public spending on water that averages 0.7 per cent of gross domestic product is insufficient to stop the ageing of water infrastructure, argues Lecamp.
Environmental opportunities
Meanwhile, on the environment solutions front, Pictet AM is eyeing opportunities presented by what it estimates is a US$5 trillion market, which is growing at around seven to 8 per cent per annum.
Pictet AM's global environment opportunities strategy has around US$8 billion of AUM and is invested in around 40 to 45 companies, said senior investment manager Luciano Diana.
By geography, over 60 per cent of portfolio companies are in the US, while about 25 per cent are in Europe, said Diana. He added that some non-Asian portfolio companies have substantial Asian exposure in their business.
For Pictet AM's environmental strategy, the focus is on investing in relatively mature technology and in companies that generate strong free cash flow, he said. The average holding period of investments is about 3.5 years.
Pictet AM breaks down environmental solutions into seven segments – renewable energy, energy efficiency, dematerialised economy, sustainable agriculture and forestry, water supply and technology, waste management and recycling, and pollution control.
Currently, the largest segment of Pictet AM's portfolio in the environmental theme is in energy efficiency, which covers industrial efficiency, building efficiency and transportation electrification.
Diana said the exposure to renewable energy has been very low because 'there are a lot of companies that might grow revenues, but they operate in an industry that is very commoditised'.
Looking ahead, a growth driver that excites Diana is being in the early innings of a US investment wave which accelerates demand for power.
He sees power demand growth in the US being spurred by demand for big data, increasing electrification and resurgence in industrial manufacturing. He noted US electricity generation could see a compound annual growth rate over the 2024-2030 period, which is six times that of the prior years this century.
The other big growth driver is growing demand for climate adaptation solutions, which is in turn being fuelled by extreme weather events, said Diana.
He sees a continued push for mitigation solutions to slow or prevent climate change, with an example being renewable energy, as well as for adaptation solutions to limit the damage that environmental changes cause such as flood defences.
Currently, Pictet AM's thematic equities platform has around US$70 billion in AUM across 16 strategies. There are over 70 investment professionals in thematic equities, led by its head Hans Peter Portner.
He views thematic equities as combining the liquidity benefits of listed equities with the tangibility of venture capital.
According to Portner, themes are pockets of economic activities underpinned by megatrends and that companies exposed to said pockets of economic activities have predictable value drivers as well as visibility on growth and margins.
The megatrends are in turn large social, economic, political, environmental or technological transformations, which represent tectonic shifts that occur over decades.
Pictet AM, which is part of Pictet Group, has been operating in the thematic equities space since 1995.
