24 Jan 2020

Investing in water: how investors can mobilise to fight water scarcity

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FOR QUALIFIED INVESTORS ONLY – This document is reserved and must be given in Switzerland exclusively to Qualified Investors as defined by the Swiss Collective Investment Scheme Act of 23 June 2006 (as amended from time to time, CISA).

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.

Big data is transforming how we invest in water

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 New investments are needed to upgrade and replace outdated facilities, or install new ones where none existed before.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

Key takeaways: the investment opportunities in water

  • The water sector is already proving a solid investment opportunity, supported by structural supply and demand dynamics.
  • Humanity’s fundamental and perennial reliance on water services suggests this secular theme will remain resilient to any short-term market fluctuations.
  • The shift towards smart-water technologies means the sector is set to benefit from major tech-driven efficiency gains, along with better decision-making in capital allocation.
  • These factors should result in further enhancements to the bottom line, particularly for the larger market players, positioning the water sector as an attractive long-term investment

How to invest in water

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.

World Water cw Total Return Index – Country breakdown and top 10 holdings

World water

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,
https://19january2017snapshot.epa.gov/www3/watersense/pubs/fixleak.html
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/
6 Waterworld.com,https://www.waterworld.com/international/utilities/article/16203079/ibm-solution-empowers-severn-trent-with-big-data
7Source:http://www.veolia.com/middleeast/sites/g/files/dvc171/f/assets/documents/2014/11/Smart_City_Water_LR.pdf
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.

This document has been provided by Lyxor International Asset Management that is solely responsible for its content.

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