This still leaves plenty of opportunity for long-term focused fund managers. Water is a $7.5trn opportunity, McKinsey believes. The firm estimates that this is the level of investment needed globally between 2016 and 2030 to keep pace with demand forecasts.
Getting more private capital into the market is what is needed to help beat water scarcity, says KBI Global Investors chief investment officer Noel O’Halloran. The tax payer will continue to carry the burden going forward, but public funding has historically been below par.
“Part of our thesis is that in the next five to 10 years there is going to be a big ramp up in terms of how much is spent on water,” he says, pointing to discussions in China, India, the US and the UK on investing more in water infrastructure.
TAKING THE PLUNGE
KBI Global Investors established the KBIGI Water Strategy in 2000, which for the first 16 years predominantly attracted retail funding. “The big institutional pension funds struggled to find a place to put it, because their consultants did not have a bucket to put water into,” O’Halloran of the now €500m fund says.
This is changing. “Some of the world’s largest pension funds believe that water is becoming, excuse the pun, more mainstream for their investments,” he adds. “More institutional interest has probably been the big change in the past couple of years.
“Momentum is building because awareness is building,” O’Halloran says. “As time goes by these problems get worse, not better.” Pension funds in California, Australia and Scandinavia have been trailblazers in this market, reflecting the droughts and other water-related problems on their door steps. There is little, but growing, interest so far from UK pension funds. One of the few to implement a water strategy is the Environment Agency Pension Fund.
A quarter of its capital has to be invested in the sustainable or green economy. This equated to £769m at the end of March 2016, £45m of which was water-related.
The size of its investment in this area is growing. Ward spoke to portfolio institutional weeks before the end of the fund’s 2017 financial year, so she was unable to confirm the size of this investment. She did, however, describe the fund’s exposure to water as an “upward trend”. “Water is on our agenda,” she said.
This strategy means that the Environment Agency, through its H2O investments, treats or provides 25,500 mega-litres of water a year.
The returns are also looking attractive. Pictet’s Water fund has an 8% total return, while KBI has generated a 4% annualised return above the MSCI World Equity index since 2000.
