Water and waste management: Three fund picks

The Share Centre's Tom Rosser discusses the high growth potential in these themes as well as his top funds

Unlike other emergent themes such as artificial intelligence and automation, water and waste have been vital to our existence on this planet for as long as civilisation

As populations have grown and rapid urbanisation has taken hold, the demand for water and the need to manage the bi-product of our consumption has increased.

The Covid-19 pandemic has demonstrated the critical importance of sanitation, hygiene and adequate access to clean water for preventing and containing disease. The World Health Organisation (WHO) stipulates handwashing to be one of the most effective ways to protect against infections, including coronavirus, yet two out of five people in the world do not have a basic hand-washing facility. This essentially means well over three billion people are unable to easily protect themselves against the spread of pathogens and infectious diseases.

Clean water and sanitation is one of the 17 UN Sustainable Development Goals (SDGs) and, despite substantial progress being made in increasing access to clean drinking water and sanitation, a lot of work and capital investment remains. This creates a compelling investment opportunity to support companies providing goods, services or infrastructure aimed at achieving universal and equitable access to safe and affordable drinking water and sanitation.

In terms of water, considerable improvements to ageing infrastructure in the developed world and sub-standard infrastructure in the developing world are needed. Sustainability measures are required to curb increasing water consumption, which is occurring through material wealth. More advanced technology is needed to develop new methods of obtaining, cleaning and storing water. These are all strong growth trends that will stand to benefit companies enabling or participating in the widespread change.

The traditional model of waste management from bin to rubbish tip is now changing. Collection methods, waste-to-energy solutions and innovations are all important considerations leading to a circular economy model focused not only on waste management. As populations grow and urbanisation increases, the work of companies within this industry will become more and more imperative. Allied Market Research expect the market size of global waste management to grow at a compound annual growth rate of 5.5% from 2020 to 2027 – reaching $2.34bn in size. This kind of growth rate is something companies in the industry should be able to profit from.

Given the high potential for growth in water and waste management activity, it represents an attractive investment opportunity in the long term. The following investments are some which may help investors capitalise on one or both of the themes:

Pictet Water is one of the original thematic equity funds which Pictet operate, having been launched in 2000. It aims to invest in companies providing water supply or processing services, or water technology and environmental services. The average exposure of the portfolio to the water theme is above 60%, with the managers preferring companies with competitive advantages and strong management committed to the long-term sustainability of returns.

The fund has certainly stood the test of time, delivering annualised returns of 8.88% – far outperforming both the sector and benchmark. It has also remained very competitive over the shorter term, currently ranking in the top 25% of the sector over 5 years. This helps to demonstrate the longevity of the water theme as well as its ability to deliver returns over shorter periods.

Fidelity Sustainable Water and Waste is a relatively new fund offering a unique combination of the under-researched water and waste management sectors. The investment philosophy is centred on the belief investments in these areas have the support of long-term megatrends, so should be able to generate sustainable investment returns long into the future.

There is a 60:40 split between the themes although the manager believes the waste market has the potential to grow significantly in the coming years. Around two-thirds of the portfolio is weighted towards the US; however, the fund does have global exposure with a number of British and European holdings also. An investment of £1000 at the strategy’s inception in late 2018 would leave investors with over £170 in profit now.

iShares Global Water ETF seeks to track the performance of the S&P Global Water Index, which comprises of 50 of the largest global companies engaged in areas such as Water Utilities & Infrastructure and Water Equipment & Materials. They are selected on the basis of the relative importance of the global water industry within their business models. With a total expense ratio of 0.65%, this ETF provides a cheap and easily tradeable way to introduce the theme within an investor’s portfolio and benefit from what is guaranteed to be a long-term, value-creating trend.


Natalie Kenway

Natalie is editor in chief at MA Financial covering ESG Clarity, Portfolio Adviser and International Adviser. She was previously global head of ESG insight for ESG Clarity and has been an investment journalist...