Tapping opportunities in water and waste

-- | 25/06/2020

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Lex Hall: Hi, I'm Lex Hall, and welcome to another edition of "How We Invest Your Money." If you've ever seen the film, The Big Short, you'll remember that at the end Michael Burry, the man who's played by Christian Bale and who's famous for apparently predicting the GFC, he announces – or should I say the credits sort of reveal – his next big investing area and that is water. And one man who is doing that is with me today. It’s Bertrand Lecourt. He oversees Fidelity's Sustainable Water & Waste Fund.

Bertrand Lecourt, welcome to Morningstar.

Bertrand Lecourt: Thank you very much.

Hall: Now, you've been telling me that water and waste is a relatively unexplored sector and yet water is such a primordial commodity, why is that?

Lecourt: I think in typical investment life we're used to cutting the world into either geographies or sectors. And when you look at thematics like water or waste management, it's really a diagonal view of the world because we don't look just to utilities; we look at all the value chain of water, which means pump makers, valve makers, desalination companies up to utilities. And water, it's a very long-term story. It's a story of civilization. When people stopped 15,000 years ago, they stopped near river or lakes or sea, started to settle, develop, use water for energy, get to big cities, get wealthier. As they get wealthier, they consume, and then produce more waste. And there's no economy without water. If you stop water, everything stops. But even if you have water, there's no sustainable economy without waste management. If you don't manage the waste well, your city dies as well. So, these two are very linked to each other. This is a very long-term trend. People tend to forget about them because in the past we didn't have that many companies to invest in and the sector has changed completely and that's a good timing to look at that.

Hall: OK. I should also say that we're going to do a subsequent video in which we chat about a few companies that are in your fund. You mentioned those drivers – urbanisation, increasing regulation, health needs, also growing middle class and consumption. Do you think that's also going to have a big impact on how the fund grows?

Lecourt: Yes, it's a mix of these five drivers that you know over the last – since 2011 more than 50% of the people in the world are in cities and it will go to 70%. So, people moving to cities get the better salary; they consume more, instead of buying three shirts, they buy six shirts. So, the velocity of consumption is important because you produce more waste and you use more water. Everything you use is water-intensive. If you take a cup of coffee, it's 150 liters of water; if you take kilograms of meat, it's 15,000 liters of water and 95% of the thing that you consume become waste in the next two years. So, this way of consuming, plus wealth, plus the pressure on infrastructure in the world you need to develop dams, the reservoir of network to be sure you can accommodate these needs and also to put waste somewhere. In the world, 50% to 60% of the waste is just dumped outside. So, there's a huge need for investment. And that is growing a bit faster than GDP in the world. So, in fact, there are two thematics which are trying grow and catch up with the habits of consumption.

Hall: And let's talk a little bit about the criteria for the companies that make it into your fund. I think from memory you look at about 330 companies and then you would look down to 30 to 50, is that right?

Lecourt: Yes, and that is the history of what is available to investors has changed a lot. So, two years ago, you had 30 stocks; today you have 230 or more and the size is around $1.5 trillion of investment potential. So, the rule of thumb is, every year you have 10 new companies coming into play, to pick in, so to choose within different geographies and different sub-segments. And when you look at these companies, we look at least 50% of the revenue of the value creation from the core thematic. And at a portfolio level, we have around 85% to 90% purity. And something very specific to this segment is that these companies are very local. You don't have a Google of water, you do not have Google of waste. They operate locally. So, the correlation between the company managing networks of water in the US and the waste to energy plant in China or a company doing irrigation equipment, which depends on price of corn, doesn't move the same way. So, you have a natural decorrelation in your portfolio, you will have the more defensiveness in absence of major shock ever since...

Hall: So, you're getting a form of diversification even though it's predominantly a double twin-themed fund?

Lecourt: Yes, because today in the fund we have 60% water, 40% waste. But we can be 100% waste or 100% water. It's based on the fundamentals. But what we see is – again it's a very local story. It's a global behavior. We all use the same water. We all have same approach to waste. But these companies operate very locally. So, the impact of what is happening on one company on one side of the world would probably not impact what's happening here locally, which is not the case with internet. Something happens on tech companies then the entire tech world is changing. This is a bit different.

Hall: All right. Let's talk about performance. I think the benchmark is the MSCI?

Lecourt: Yes, we use MSCI World as a benchmark and there's no perfect benchmark for that that exists. But the spirit of it is most of the investors we talk to can invest in global equities. So, you have to have a global benchmark. And if you look at the story of the water and waste, it's a global with momentum and it grows naturally a bit faster than GDP, GDP plus 1, plus 2, plus 3. So, over 20 years you could expect some of the earnings over the last 20 years have gone 10%, 12%, 15% of dividend. So, 15% total return that is in multiples that always moved on, you could get. We said on average you could beat the MSCI World by 3% on a three- and five-year basis, that's what would happen, you can have shocks, it’s up to me to manage it. But over time we feel that it's going to grow a bit faster than the economy.

Hall: All right. Well, like I said, we're going to investigate a few drill-down into fund and investigate a few key names. So, look out for that video. But for the time being, Bertrand Lecourt, thank you very much for your insights today.

Lecourt: Thank you very much.

Hall: I'm Lex Hall for Morningstar. Thanks for watching.

This report appeared on www.morningstar.com.au 2020 Morningstar Australasia Pty Limited

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