Speaker 0:
to discuss water as an investment theme. I'm joined here in the studio by Simon Godlier. He is fund manager and co-founder of Thematics Asset Management, and we're also joined by Darren Pil Beam. He is head of UK sales at the investment Managers. Uh, Simon, let's start with you when you put money into water as an investment theme, what exactly is the opportunity set you're buying into?

Speaker 1:
So I suppose there are a few characteristics that I would use to describe the investable universe for water. It's It's global, it's highly diversified. So you have a range of business models and different types of company, from industrial exposed businesses to companies supplying irrigation equipment to farmers

Speaker 1:
to waste management businesses, pollution testing companies and, of course, utilities and concessions. Businesses providing drinking water and sanitation.

Speaker 1:
Um, but it's also, you know, a AAA very defensive, growth oriented, uh, opportunity set. Um, it's global.

Speaker 1:
Um, it is a very elegant way to get exposure to sustainable investment themes and underlying business models, and I think I would characterise it as having a very high active share relative to a typical global equity benchmark. So there are a lot of long term growth drivers that underlie the sector that give us optimism that for the next 20

Speaker 1:
30 40 years, this is going to be a very exciting place to

Speaker 0:
invest. And is it a theme that does well in certain market conditions such as low rates? Or is it one bit of a hardy perennial?

Speaker 1:
It's typically more of a hardy perennial. I'd say I mean, we do have a sort of direct inflation hedge through the utility businesses, which are able to pass inflation straight through to their customers.

Speaker 1:
We have companies in the opportunity set with mission critical products and therefore typically very strong pricing power who are who are able to weather a difficult market, perhaps better than some other stocks. I think if you look at the performance of the water sector over the last 20 years or so,

Speaker 1:
is performed extremely well, particularly again relative to a global equity opportunity set. And Darren,

Speaker 0:
when you're out talking to clients, do you find there's a bit of a gap between what water does as an investing theme and what their initial impressions are of what it can do? Oh, definitely abs, absolutely. You know, first of all is that that lower beta profile, which is very attractive alongside the defensive growth mindset as well I think that does come as as a bit of a surprise.

Speaker 0:
Secondly, in terms of its performance over the past few years, you know, good, good, relative risk adjusted performance which you know in a in a bull market, sometimes gets overlooked. And Simon, what specifically makes it an interesting investable theme for 2023

Speaker 1:
I think you know, we've historically seen growth in the sector of around 5 to 7% per annum. And we are today seeing some very interesting new technologies come into the space. The idea of smart and connected devices, the idea of the consumer having interfaces with various water products through their phone. We're seeing, uh, federal stimulus dollars hitting the water market. We think that will have a substantial benefit to to the space in the second half of this year.

Speaker 1:
And I think one of the key areas of growth that we're seeing is is P a. So these forever chemicals, um you know that that come from, for example, firefighting foams and military bases, those sorts of things which you're providing or or presenting

Speaker 1:
a huge environmental problem. And it's very often the water companies and some of the waste management companies out there that are providing the solutions and technologies to get rid of these nasty chemicals. We think that that's going to add, you know, potentially up to 100 basis points of growth to the sector in the coming, you know, 12, 24 months. How

Speaker 0:
much is this? A very top down theme, and and within that, how important is stock selection?

Speaker 1:
So, you know, clearly you need to be very macro aware when you're you're investing in thematic equities. But ultimately we're looking for individual stocks and uncorrelated returns. So So I would describe water investing as very much bottom up.

Speaker 1:
Um, you know, you're looking for competent management teams you're looking for, you know, very strong business models. You're looking for sustainability criteria to be sort of ticked off the list, so to speak. And you're also looking for liquidity and trade ability. So I think you know, when you have all of those things, you know, the analysis that we perform is very much bottom up, conviction driven,

Speaker 1:
setting a target price and then trading positions around that target price.

Speaker 0:
Deb, what are your thoughts on that? Specifically where a theme like this fits in an overall plan portfolio. Having the ability and the expertise to cut through a lot of the noise in some of these more niche themes is, you know, powerful, powerful trait to have. And you know, we're speaking to to wholesale clients.

Speaker 0:
And we have been for for a number of years, who are always looking for for new ideas, new themes, new trends. But more interestingly, now we're seeing institutional clients are looking at this as an asset class and identifying the, you know, the positive, uh, diversification benefits, as well as the defensive mindset that some of these themes can add to some of their their their portfolios. But some of what makes this a coherent investment theme rather than a slightly

Speaker 0:
messy approach, which is ultimately a global equity fund that can go anywhere.

Speaker 1:
I think you know, within the the the thematic boundaries that we set, we go out and look at the entirety of global equities. Look for companies that are exposed to the theme of water, whether it be through a technology or a service provided to, you know, an end user or a company, an individual. Or we look for global market leadership in that particular niche market.

Speaker 0:
So what? Something like a beer or a drink

Speaker 0:
company being there, given that a large component of beer is is

Speaker 1:
water. So I mean, it's a great question. I mean, the simple answer is no. So, typically, we're looking for the companies that are supplying the technologies that treat clean up, move water for the broader industrial economy. In other words, you know, there are There are businesses that are very, very good in terms of reducing their water consumption, et cetera.

Speaker 1:
We're not per se interested in those companies. We're interested in the technologies that they're using and the companies that supply those technologies to achieve the the water efficiency.

Speaker 0:
Dan, we've been talking a lot about water as a theme. But more broadly, what do you think the demand for thematic investing is full stop right now?

Speaker 0:
Yeah, I mean, ultimately, we we listen to our clients and we try to provide solutions to some of their some of their problems and the beauty of the model at a success is that we have various affiliates that can cover a wide variety of themes, one of those being Thematics Asset Management, which, although only formed in 2018,

Speaker 0:
now up to over three billion in terms of assets under management covering a wide variety of channels from retail, wholesale and, more recently, institutional. And how would you, when you're out and about talking with clients, potential clients? How are they using a strategy such as this in a broader portfolio?

Speaker 1:
Well, I think we've touched on a lot of this, I think, you know, defensive growth, low beater, high active share. Um, you know, a strong track record of outperforming global equities over a sustained period of time. All of these things are resonating with both, you know, retail and wholesale as well as increasingly institutional clients. I mean, I I would add to to one of Darren's comments that you know that the pendulum

Speaker 1:
has very much sort of begun to shift more towards institutional investments. Historically, probably around 80% of of of the book of clients, for a typical water strategy would have been retail and wholesale.

Speaker 1:
I I think we're seeing now that sort of that That that number shift, you know, increasingly towards having a little bit more institutional interest. So perhaps, you know, you know, 30 to 40% and 60 retail wholesale will be the direction of travel from here.

Speaker 0:
Now, I would just add to that, I think typically when we've been speaking to to potential clients in recent times, they've always looked at water as maybe a satellite position within their their broader equity allocation.

Speaker 0:
We see no reason why that shouldn't become more core now, particularly as as the trend as you've identified is essential for life. It's going to be around for a very, very long time. And, you know, we see that trend continuing as we increase allocations with satellite. We certainly see it becoming more core.

Speaker 0:
And Darren, what do you think having this thematic lens gives an investor that perhaps more traditional, perhaps more geographic based ways of investing don't doesn't give you that same sort of set of advantage. I think we've mentioned the phrase long term quite a bit today, and this is a long term theme, and through some of those

Speaker 0:
those globalisation, the digital, the climate issues that we're all talking about all the time. This has given them the opportunity to invest and do good for certain sectors and adding in the water theme alongside various other themes. You can add those greater diversification benefits to a client's overall portfolio. We've touched on E. S G and sustainability a number of times in this conversation. So how do you expect this sector to evolve over the next few years? I

Speaker 1:
think

Speaker 1:
you know, the the the theme as a whole has this sort of slightly slow growth slow and steady characteristic associated with it. Uh, I think we are going to see more technology coming into the space, more smart and connected devices across the value chain.

Speaker 1:
I do think we're going to see more growth coming out of Asian markets. We we might perhaps not see as many IP OS as we have been hoping for over the last 10, 20 years. There are clearly sort of there continue to be legacy governance concerns around. For example, you know some of the emerging economies in the east.

Speaker 1:
Um but I do think that there are tremendous growth opportunities in those markets for developed economy businesses. So, for example, you could look at larger US and larger European businesses that are very well established that are able to capitalise on the growth coming out of a market like China or India. For example,

Speaker 0:
why the tax investment managers for thematic investing?

Speaker 0:
The beauty of our model is that we have, you know, a wide range of affiliates underneath the the investment managers banner that we can discuss with our clients. And ultimately it does depend on what the client is looking for. And with thematics, they have a wide range of themes that clients can

Speaker 0:
invest in. And as we're starting to see, particularly in the institutional world, they're really opening their eyes to these new opportunities. Given all the benefits that we've discussed around diversification, low beta profiles and ultimately high active share investing, which is something that they they seem to be really keen on. And Simon, why thematics Asset Management for

Speaker 1:
water?

Speaker 1:
I think you know we have a uniquely experienced management team with a very strong track record of investing in the sector over a number of years, but I think equally today, you know, people are very conscious of where they're putting their money they want to be able to draw a line between their capital and the underlying companies that they're investing in. And I think that a water strategy with underlying stories and and tangible examples of of a responsible, uh, benefit that the companies are bringing,

Speaker 1:
you know, it's a very elegant way to do

Speaker 0:
that. We have to leave it there. Darren Pil Beam Sim Gu Thank you for joining us.

Speaker 1:
Thank you. Thank you.