In general the universe of stocks linked to pure water companies is limited. KBI invests in 40-50 stocks at a time from a universe of 140. The JB Natural Resources Fund has less than 50 stocks it invests in. Bisschop says the number of companies in the water investment world makes the strategy vulnerable to liquidity risk, and portfolio recycling does not happen very often.
“Turnover is pretty low on a longterm basis,” says Bisschop. “It isn’t a fast evolving business, the technology isn’t like the IT space. The average holding period is five years and last year we added five to six names.”
Bucket loads
Another of the major problems in attracting new institutional money so far has been the conundrum of where water should sit in the allocation buckets. Gottelier says that water could easily sit in an infrastructure, equities or opportunistic basket. But the lack of clear definition makes it harder to benchmark your performance. While there are a number of indices out there to track the market, most of the water fund managers are loathe to use them and prefer to track against a global equities index like the MSCI World.
“You do have some indices—like the S&P Water,” says Bisschop. “Some clients ask to compare to this, but these are not our benchmarks. The names are not interacting with our own and some of the weightings don’t make sense.”
According to KBI a recent snapshot of three recognised water indices showed constituents ranging from 28 to 60 companies. Still, some investors at least believe that benchmark tracking might be a viable way to tap the market. For example, the iShares S&P Global Water ETF, which tracks the S&P Global Water index has so far raised assets of $221m from both retail and institutional investors.
Outflows
Most importantly, despite its appealing message, the water theme is not immune to crises. The sell-off in equities in 2007 hit the sector hard resulting in huge outflows from funds active in this area.
RobecoSAM at its peak managed €1.9bn compared to €1bn now. Pictet had $6.5bn in 2007, a figure which has halved since then. Interest clearly has not returned to previous levels, but things move slowly in this space. Some have managed to maintain growth in the sector, however: Impax has seen its water- themed investment fund grow from €100m at the end of last year to €320m now, with most of that growth coming from new institutional money.
“We’ve been able to get interest from our good track record,” says Gottelier. “People’s heads are also turned by the idea that water is life sustaining.”
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