Simon Gottelier invests $1.7 billion in water.
The money manager at London-based Impax (IPX) Asset Management Ltd. buys shares of companies with at least 20 percent of their revenue, profit or invested capital in water-related operations.
Gottelier says that investing in water offers an opportunity to outperform equity benchmarks, Bloomberg Markets magazine will report in its October issue. And since starting the strategy in January 2009, Impax has done that.
The approach returned 17.1 percent per year gross of fees as of July 31, according to data from the firm. That was almost 3 percentage points better than the MSCI AC World Index’s annual return during the period.
The strategy is offered in institutional accounts and via the 754 million euro ($975 million) BNP Paribas Aqua (BNPAQUI) fund, which Impax runs for Paris-based BNP Paribas Asset Management.
Water -- a basic need for industry and agriculture as well as for drinking and sanitation -- is a more than $500 billion market globally and is growing at 5 to 7 percent a year, according to Impax. By comparison, world gross domestic product will increase an average of 2.9 percent in 2014, 2015 and 2016, according to economist forecasts compiled by Bloomberg.
“We think it’s a multi-decade-long opportunity,” Gottelier says.
Impax, which was founded in 1998 and is listed on the London Stock Exchange’s AIM market, oversees about $4.6 billion overall.
“All that money is targeting the resource-optimization space in areas where we believe that there’s rapid growth taking place,” says Ian Simm, the firm’s founder and chief executive officer.
The core of Impax’s investing thesis, Simm says, is that markets that are attempting to address environmental challenges and resource constraints will grow faster than the broader economy.
Population growth and movement, particularly in emerging markets, is a long-term trend that will spur investment in water, according to Gottelier. Rapid expansion of cities in emerging markets will require new infrastructure.
“An example would be China, where between 350 and 400 million people are expected to move from rural to urban areas between now and 2050,” he says, pointing out that that’s more people than the current U.S. population. “That inevitably puts a huge amount of strain on existing infrastructure.”
Tapping into China
To tap into those markets, Impax has invested in companies such as China Everbright International Ltd. (257) and Beijing Enterprises Water Group Ltd., both partly state owned. China’s stakes in the companies give Impax a level of comfort on their governance, Gottelier says.
Also, it means that the firms have access to cheaper funding and will win more government contracts than they lose. “You’ve had some incredible growth from these businesses and fantastic stock market performance,” he says.
Shares of Hong Kong–based China Everbright, which develops water and environmental protection projects, gained 51 percent during the 12 months ended on Aug. 11, when they traded at HK$10.54. Beijing Enterprises Water (371), the biggest publicly traded water treatment developer in China, rose 60 percent in the period.
Another growth theme is the adoption of stricter regulations in Asia, Europe and the U.S. “Government oversight of water quality and government oversight of air quality are very key,” Gottelier says. “It’s a global phenomenon.” In the U.S., potential regulations on hydraulic fracturing, or fracking, to extract natural gas from shale will benefit some of the companies Impax invests in.
“We view fracking as a water technology, the byproduct of which is the production of hydrocarbons,” he says.
About 2 million to 5 million gallons of water are used for the operation of each well, and the wastewater needs to be treated before it’s disposed of, Gottelier says. “Companies treating water for the drillers should be the net beneficiaries of any increase in oversight,” he says.
Ecolab Inc. (ECL) is one such company. Although its services to the natural gas industry make up a small part of its overall business, the company has a strong foothold in the sector, Gottelier says.
Another Impax pick is Xylem Inc. (XYL), which was spun out of ITT Corp. (ITT) in 2011. The Rye Brook, New York–based company “is the world market leader in pump making and valve making,” he says. Xylem also makes equipment such as remote groundwater-pollution-monitoring systems, putting it in a good position to benefit from growing populations and stricter regulations. Shares of Xylem rose 46 percent in the 12 months ended on Aug. 11, when they traded at $36.56 in New York.
Impax rebalances its investments according to the firm’s read on macroeconomic factors, valuations and other inputs, Gottelier says. Infrastructure builders tend to benefit when economies expand, for example, while utilities hold up well in downturns. “All of these companies, from a stock market perspective, move in very different ways through the cycle,” he says. “If you allocate to the right technologies at the right time, you can achieve quite diversified performance.”
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