As we celebrate the United Nations’ 33rd World Water Day, and at the same time our 25th year managing water assets, it is a good time to reflect and consider how investing in water might look over the course of the next quarter of a century.
Some small water stocks traded at the time of launching our dedicated water strategy, but the modern water investing theme was arguably born at the height of the TMT bubble; we have since witnessed a major transformation of the water industry and water stocks.
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The industry players have changed a lot over the years, with the family trees on the current line-up of water companies – management teams too – tracing a complex lineage, and that trend will most certainly continue. Today, based on our analysis, most of the larger publicly traded water companies have very healthy balance sheets, with a stated strategy of inorganic growth and robust M&A pipelines.
The pre-great financial crisis acquisitions, and sometimes questionable integration of businesses in the housing boom-led market strength, really tested the companies during the global financial crisis of 2008/09 and the following years of austerity and housing indigestion. Coming out of the financial crisis, many companies found themselves looking in the rear-view mirror, licking wounds and restructuring their global operations. Mini-crises continued over the years with the European recession and the so-called industrial recession, which further challenged water companies in their strategy and operations.
Out of that tough period came a realignment of the industry around core niches. Companies started looking through the windshield again and began to seek out #1 or #2 positions across the wide diversity of water markets and invest in growth. Many shrunk or exited bad or non-core businesses and grew or acquired much better businesses, taking advantage of emerging digital solutions that advance margins, growth rates and competitive differentiation. Management teams got better at procurement and pricing thanks to geopolitical pressures in Trump’s first term, which was as valuable during the pandemic as it is today with Trump’s second term.
After 25 years, what has emerged is an industry sitting pretty, the water companies and markets growing in confidence and maturity, ready to tackle the years ahead, with few if any industries able to demonstrate the same level of robust positioning. Applying the framework of Porter’s Five Forces, the water industry today has significant barriers to entry, minimal substitution or technological obsolescence risk, boasts numerous customers and suppliers, and rational competition in almost all niches.
The key drivers of our own investment strategy – first articulated 25 years ago, and pushed forward by population growth, industrialisation (the trends in AI and reshoring included), urbanisation, infrastructure rehabilitation and increasing regulation – are even stronger today. This is furthered by what climate scientists are warning might be an exceptional period of warming, rising seas and ultimately an accelerated water cycle, leading to more severe weather, flooding and droughts.
While China in the 2010s, and India more recently, have been exciting growth markets for water, we would expect the next 25 years to benefit from recent signs of growth from the UK and Brazil, and ultimately, strong growth from developing regions such as Africa and South-East Asia.
Investors typically gravitate towards thematic investing because they believe the long-term drivers of the markets and/or their competitive structural nature will facilitate outperformance over time. The merits of thematic water investing have been proven over the last 25 years – it has undoubtedly been one of the most successful non-sector investment themes, and we are excited to see how the next 25 years play out in this evolving market, rich with companies delivering some of the most innovative solutions to the global problems around water scarcity.
