‘Global profit opportunity’ in water whets European investors’ appetite

Thematic funds investing in clean water, waste and new resources were among most popular in Europe

Thematic funds that invest in resources management such as clean water, waste and new resources were among the most popular products in Europe amid growing appetite for secular growth themes.

In its Global Thematic Funds Landscape report, Morningstar Manager Research found that Europe is the largest market for thematic funds, accounting for 54% of global thematic fund assets.

Resource management is now the biggest theme in the region with $21bn (€19.1bn) in assets under management, as at 31 December 2019.

This theme encompasses funds that fall into the following global categories: Shale Revolution, Upstream Natural Resources, Rare Earth Resources, Resource Tech, Clean Water, Water, Waste, Water Infrastructure, Air, Efficient Resources and New Resources.

The report said the theme’s growth in Europe was largely down to flows into the Pictet Water Fund, with the group having the biggest share of European thematic AuM thanks to its range of actively managed thematic funds.

The Pictet-Global Megatrends Fund is the largest thematic vehicle in Europe, with $9.4bn in AuM, being exposed to the groups’ range of nine thematic funds including clean energy, robotics, security, digital and water.

Profit from water

Kenneth Lamont, co-author of Morningstar’s report, explained the demand for water funds: “Fresh water is not distributed equitably across population centres, nations or regions. Moreover, given its weight, water is not easy to transport in sufficiently large quantities.

“As population grows, supply and demand for water will become progressively more imbalanced especially in arid regions with contaminated water.

“For regions with easily accessible water resources like rivers and underground aquifers, the risk of overconsumption and inefficient recycling are real threats to the sustainability of these resources. These constraints pose a global profit opportunity.”

He added: “Specifically, growth is expected to be driven by global trends towards greater desalination and water reuse, water conservation, energy efficiency and enhanced technology.

“In order to accomplish these operations, massive investments in water-related infrastructure will be required as existing water systems (even those in the developed world) are antiquated and inadequate.

“To the extent governments can subsidise these infrastructure projects, global water companies should benefit from these trends as a result of their technical expertise.”

Thematic demand

Looking at thematic funds across the globe, the report also said investor interest for the asset class has increased, but is “uneven across geographies”.

Over the three years to 31 December 2019, collective AuM in thematic funds grew nearly threefold, from $75bn to approximately $195bn worldwide. This represents approximately 1% of total global equity fund assets, a dramatic increase from the 0.1% share reported 10 years ago.

However, while all regions have experienced net inflows over the trailing five years, Europe and rest of the world have been the main beneficiaries, netting $45bn and $36bn in new flows over the period, respectively, the report said.

Furthermore, European-domiciled thematic funds’ share of the global pie has expanded from 2% to 54% since the year 2000. Despite growing tenfold in size, the market share of thematic funds domiciled in North America decreased from 28% to 16% over the same period. 

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Natalie Kenway

Natalie is global head of ESG insight for ESG Clarity and has been an investment journalist for 16 years. She won Editor of the Year at the Aviva Investors Sustainability Media Awards 2021, and was Winner...