23 Jan 2020
23 Jan 2020
Across the developed world, our most essential need – water – appears effortlessly and abundantly from the tap. It costs us next to nothing. Yet while we experience easy abundance, under the surface, maintaining the world’s water flow has turned into a serious challenge.
Population growth is one of the biggest issues. In 1950, the world’s population was around 2.6bn. It has nearly tripled in the 70 years since then, reaching an estimated 7.7bn in 2019.1 And while the population has been growing, water consumption per person has too, driven by improving living standards and water access in the developing world.
Billions more people, each consuming more water – all while clean water supply is hit by climate change and the resulting droughts and extreme heat; it’s little surprise the UNCCD predicts water scarcity in some arid and semi-arid places will displace between 24 million and 700 million people by 2030, under the current climate change scenario. Beyond the risks to water supply for everyday use, this could have a profound impact on water-intensive industries like agriculture and energy.
Investors are waking up to the fact that mounting challenges to water supply, and relentless demand, are creating persistent momentum and high-growth potential for companies operating in water supply, wastewater treatment and desalination.
Traditionally, water has been viewed as a fairly conservative industry, a world away from the fast-growth, big-data-driven companies that define the technology sector. That is set to change.
Across the world, water infrastructure is ageing. New investments are needed to upgrade and replace outdated facilities, or install new ones where none existed before. EPA data shows that household leaks can waste more than 1 trillion gallons annually in the US alone – that’s the equivalent of the annual household water use of over 11 million homes.2 The need to improve capital-allocation decisions through better monitoring of water networks and physical assets has led to a surge in smart meter installations across water networks, while increasing the adoption of network data collection technologies.
These mountains of data require assessment and analysis, and water company investments have been increasingly tilting towards data management tools. A survey of water utilities (conducted by the Smart Water Networks Forum for engineering firm C2HM and the Water Environment and Reuse Foundation) showed that, in 2017 alone, around a third of respondents implemented technology to store and process big data, with another third already having done so in previous years.3 Specifically in the US, the municipal water sector is expected to spend over $20 billion over the next decade on software, data, and analytics solutions.4
Because of these investments, water utilities are now making operational leaps, resulting in greater profitability and better resource management. Some of the holdings in our ETF are early adopters of the shift towards smart water. US water technology supplier Xylem has been expanding its big data activities by acquiring water-tech startups. In 2017 the company acquired Pure Technologies, which offers intelligent leak detection and condition assessment solutions for water distribution networks; a year earlier Xylem also bought smart meter company Sensus and data analytics firm Visenti.5
Similarly, UK water utility Severn Trend leverages technology built by IBM to better monitor and reduce polluting overflow issues in their sewer network.6 Taking a different tack, transnational water services company Veolia is developing many similar technologies in-house.7
Lyxor manages one of the oldest and largest water-dedicated ETFs in Europe.8 Over the past decade – during which equity markets performed strongly – the World Water Total Return index underlying our fund still managed to outpace the MSCI World Index, as well as a competitor benchmark, the S&P Global Water EUR index.9
Starting with a universe of global developed and emerging market stocks, our water ETF mobilises capital towards the 30 companies with the largest share of revenues derived from water-related industries. These include water utilities, which supply water and provide post-treatment services for waste water; water infrastructure companies, such as consulting firms and suppliers of pipes, pumps, valves and meters; and water treatment firms, including suppliers of disinfection, filtration and desalination products and technologies.
Source: Lyxor International Asset Management, as at 05/12/2019
This article is for informative purposes only, and should not be taken as investment advice. Lyxor ETF does not in anyway endorse or promote the companies mentioned in this article. Capital at risk. Please read our Risk Warning below.
1 Nations estimates. https://www.un.org/en/sections/issues-depth/population/index.html (1950 figures) andhttps://population.un.org/wpp/Publications/Files/WPP2019_Highlights.pdf (2019 figures)
2 United States Environmental Protection Agency,
3Source: The Smart Water Networks Forum, https://www.swan-forum.com/swan-research/4 Bluefield Research, https://www.wateronline.com/doc/smart-water-questions-answered-0001
5 Xylem website,https://www.xylem.com/en-us/about-xylem/newsroom/press-releases/xylem-to-acquire-pure-technologies-a-leader-in-smart-infrastructure-assessment-and-management-for-the-water-industry/
8Source: Lyxor International Asset Management, as at 20/01/2020. AuM of the Lyxor World Water UCITS ETF was €840m as at20/01/2010.
9 Lyxor International Asset Management, Bloomberg, as at 31/12/2019. Past performance is not a reliable indicatorof future results.
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