By
Matt
Sheldon
:
One of the concepts regarding "investing in water" that we
struggle to communicate is that it is not a sector bet. That is
hard to comprehend since most of the stocks in which we invest are
either industrial companies or utilities. But because water courses
through the veins of the global economy, a water investing strategy
has a multitude of end market drivers, providing a stabilizing and
diversifying growth element to a global equity allocation.
With the recent circulation of aiCIO's periodic table of annual
hedge fund strategy returns (
here
), it reminded me that a picture is worth a 1000 words. Using this
structure, we have put together a periodic table of MSCI All
Country (
ACWI
) sector returns over the last 10 years, inserting the performance
of our KBI Water Strategy (gross returns). Unlike the ACWI sectors,
which come in and out of favor year by year, Water performs
consistently in the upper tiers - and rises to the top in aggregate
over the last 10 years.
(click to enlarge)
Source: Kleinwort Benson Investors, Datastream, MSCI, total
return, based in USD, gross of fees as at December 31st 2012
Why is this? Because water is such a critical component of life
and industry, water businesses are driven by diverse and sometimes
geographically specific end market dynamics. Perhaps, the best
example for this is Pentair (
PNR
). Nearly 20% of its sales are related to housing - i.e. the
consumer discretionary sector. A further quarter of its business is
generated from sales to power plants, refineries and gas processors
(energy sector) and nearly 10% is sold to food and beverage
companies (consumer staples). Another example isKurita Water
(KTWIF.PK) in Japan. It sells ultrapure water equipment and
services to the semiconductor and flat panel display companies
(technology) and steel mills (materials). It also sells water
treatment chemicals (materials) to its customers. Companies selling
analytical equipment or components to the water industry for
quality testing, like Danaher (
DHR
) and Idex (
IEX
), are also selling into biotech and pharma laboratories
(healthcare) and electronics manufacturers (technology). In total,
almost all the sectors in the global equity market are
represented.
The other reason for the consistency in performance is that
investing in water provides both risk-on and risk-off investment
options. Regulated water utilities can act quite defensively while
water infrastructure companies can act very cyclically. Being able
to actively manage between these two based on bottom up valuation
metrics and top down perspectives has resulted in a beta of the KBI
Water Strategy of approximately 1.0 since inception in late
2000.
Why does this distinction matter? Investing in water means
different things to different people, so it is important to outline
exactly what we mean and take on the
myths
that create hesitation to the opportunity. Faced with a "sector
bet" decision, the question is whether the short- to mid-term
timing and conditions are ripe for outperformance. But we would
argue that investing in water requires, instead, an understanding
of the long-term tailwinds, and appreciating the breadth of those
tailwinds across many end markets and companies. From that, we
believe, the long-term consistent outperformance is derived.
Disclosure:
I am long [[PNR]], [[DHR]], [[IEX]], [[KTWIF.PK]]. I wrote this
article myself, and it expresses my own opinions. I am not
receiving compensation for it. I have no business relationship with
any company whose stock is mentioned in this article.Please see
profile page for full disclosure.
See also
Dunkin' Brands Group, Inc. Presents at UBS Global
Consumer Conference, Mar-14-2013 10:30 AM
on seekingalpha.com