Water investments? Michael Burry was one of the first institutional investors to bet against the US subprime mortgage market in the mid-2000s, and today he’s concentrating all of his investment efforts on one commodity: water.
Burry’s focus on water has attracted plenty of attention to the commodity in the investment community but trying to profit from water isn’t easy. In comparison to other commodities, water is highly regulated. Most water rights are owned by governments, and utility providers are strictly monitored by government agencies to prevent price gouging or aggressive business practices that other firms might be able to get away with.
- Michael Burry: Of The Big Short Fame, Hedge Fund Holdings
- A Series Of Michael Burry’s Scion Value Fund Annual Letters
- Bizarre? “Michael Burry is focusing all of his trading on one commodity: Water”
All of these regulations are designed to ensure that water remains accessible for the world’s citizens but as H20 becomes a commodity without an exchange, how do you invest in water? Do you purchase the rights? Invest in farmland with native water supply? Or is it best to invest in infrastructure, delivery and technology solutions?
Water investments ? – Michael Burry: Water as an asset class
“Water As An Asset Class” was discussed by analysts at the IMN’s 22nd Annual Alpha Hedge West Conference at the beginning of September. The panel came up with some interesting ideas for investors, who don’t have the firepower to buy regulated utility. David Richardson Of Impax Asset Management has three ways to invest in water. These include:
1) Own water rights, which not be the most suitable advice for the average investor. Water rights are costly and it’s difficult to build a diversified portfolio of water rights assets.
2) Own a stake in infrastructure projects. The transportation of water from where it is to where it’s needed.
3) Companies that provide equipment to the water industry, perhaps a more viable strategy for most investors looking to gain exposure to the sector. On this topic, Michael Underhill of Capital Innovations believes the most compelling technology right now is graphene technology where water goes through a filter/screen and comes out pure.
Thomas Schumann of Thomas Schumann Capital LLC is launching a US water fund to capitalize on these opportunities and help investors gain exposure to the world of water. Right now there are no US funds focused on water. In Europe, there are already nine funds following this strategy, so it’s clear the demand for such a product is there. Schumann’s water security fund will have 15 to 20 positions focused on the US. American Water Works Company Inc and American States Water Co are examples of liquid, tradable US water opportunities.Thomas Schumann presented his idea alongside the water debate at the Alpha Hedge West Conference. According to the Schumann presentation, water is currently a $600 billion market that could grow to as much as $1 trillion by 2020. Considering that water is a regulated defensive industry, annual growth of 5% to 8% is nothing short of impressive.
And to buy into this growth you don’t have to be a multi-billionaire hedge fund manager with government contacts. Liquid, publicly traded equities provide exposure to the water market. These equities have outperformed over the past few years. Indeed, over the past decade, the S&P Global Water Index has produced a total return of approximately 80% compared to the gross total return of the S&P Global BMI index of just under 50%.
The top five holdings of the water index are:
- Geberit AG Reg
- American Water Works
- Pentair PLC
- Xylem Inc
- United Utilities Group
One investment in the water space Wall Street likes is Xylem, which is currently in the process of acquiring Sensus, the smart water metering company for $1.7 billion. According to analysts at RBC, “the deal further propels Xylem up the technology curve with smart water networks, data analytics, and new SaaS opportunities through the FlexNet platform.” What’s more, Xylem’s management believe that Sensus acquisition offers “ample revenue synergies…leveraging Xylem’s installed base in wastewater and outdoor water networks, along with expanding into underpenetrated international markets.”
Outside the US one water market that might attract the more risk-tolerant investor is China. Investing in China’s equity market can be a risky business but the water opportunity may be too much for some investor to pass up.
China: Water shortage and Water investments
China’s water situation is critical for a country that wants to present itself as a developed nation. According to Morgan Stanely’s research, which draws on information from the international non-profit firm WaterAid,around 4.5% of China’s population (or 63 million people) do not have access to safe water.This has led to government action on China’s water segment, such as the release of the Action Plan of Water Pollution Control in 2015, as well as the government’s reiteration of its focus on the water segment in the 2016 Government’s Working Report.
Still, like most nations, the Chinese government has tight control of the water market making it difficult for private investors to profit from state spending on infrastructure. That’s where waste water comes in according to Morgan Stanley’s research. Specifically, the bank’s research on the topic of water investing in China turns up waste water as a “sweet spot”. Waste water supply is more dominated by local governments, with less opportunity for listed companies. Over the next five years, Morgan expects Chinese policy makers to devote RMB535 billion to waste water capacity development presenting a huge opportunity to those companies positioned for growth in the industry. Here are the companies Morgan is betting on:
“We identify three factors for a company to benefit from supply-side reforms: 1) a market leader that can leverage its existing network / exposure to tap into further opportunities; 2) a state-owned enterprise (SOE) that should have better relationships (than nonSOEs) with local governments to secure investment opportunities;and 3) a strong balance sheet. We assume coverage of four water stocks, with Overweight ratings on Beijing Enterprises Water (BEW), Guangdong Investment (GDI) and Beijing OriginWater (OriginWater),and an Equal-weight rating on Beijing Capital (BJ Capital).”
Overall, investing in water is neither hard nor complex. There are many ways of investing in the world’s most valuable commodity and as the world’s population continues to expand, water assets are only going to become more expensive.