Is The New Alts Investment In Your Sink?

Duff & Phelps President Describes Investment Opportunities In Water Technology, Solutions And Resources, Pros And Cons Of Water Investing And How It Fits With ESG

Every morning you shower in it, brush your teeth with it and make your coffee from it – but have you ever thought about investing in water? An investment in water isn’t limited to buying shares in the producer of your favorite bottled spring water – opportunities exist to invest in a broad range of water resources, efficiency systems and technologies.

Founded in 1932, boutique investment firm Duff & Phelps Investment Management specializes in real assets, with funds covering real estate, energy infrastructure, utilities, clean energy and water guided by its proprietary fundamental research in these areas. An affiliate of Virtus Investment Partners, Duff & Phelps has $13.2 billion in assets under management, including $800 million in water funds.

With over three decades of experience,David Grumhaus, President and Chief Investment Officer at Duff & Phelps, leads the firm’s investment team, including portfolio management and research, and previously served in various investment roles including at Goldman Sachs.

We asked Grumhaus about the rise of investment opportunities in water, the pros and cons of water investing and how water investing dovetails with ESG.

WSR: What are the investment opportunities in water, and what drivers are causing these opportunities?

Grumhaus: Today, the world is experiencing significant water challenges, with more than 2 billion people lacking access to safely managed water and more than 4 billion people without safely managed sanitation. Pervasive droughts, water contamination and deteriorating infrastructure exacerbate supply, while demand continues to grow due to population growth, industrialization and higher living standards. 

The combination drives an increasingly challenged future, as McKinsey projects the gap between supply and demand will reach 40% by end of the decade.

Estimates indicate trillions of dollars of investment in water are needed to shrink the gap and improve the sustainability of global water resources. Governments, corporations and investors are waking up to the challenge and increasing investment in water infrastructure and technology.

With this backdrop, we see a number of attractive investment opportunities in water companies that are improving supply, quality and efficiency. Water supply companies are benefitting from increased investment in water infrastructure, as they provide the water networks (i.e., utilities) and supply-related components such as pipes, pumps and valves.

Water efficiency and quality companies are benefitting from increased investment in technology as adoption expands among water users. Technologies are key to reduce water loss, meet water quality standards and enable alternative sources of water, such as reuse and desalination.

Water efficiency companies develop automation controls, irrigation equipment and leak detection technologies, while water quality companies provide treatment, filtration and testing. With the significant backlog of investment needed in water infrastructure and technology, these companies are well positioned to produce secular earnings growth for years to come.

WSR: What are the advantages and disadvantages of investing in water?

Grumhaus: We see a number of advantages in the water sector, including secular earnings growth driven by clear catalysts, durable cash flows and an attractive track record.

Some catalysts include increased resiliency investment as climate change events occur more frequently and in greater magnitude (water accounts for about 90% of climate related events), government support (increased funding and more stringent regulations) and corporate sustainability initiatives (operational and ESG-related).

Additionally, water companies benefit from durable cash flows, as water infrastructure and equipment are critical for daily life and a functioning economy. The combination of secular earnings growth and durable cash flows has driven attractive returns. Since its inception in 2001, the S&P Global Water Index produced greater than a 10% compound annual growth rate, materially outperforming the S&P 500 and MSCI ACWI during the period.

One of the biggest challenges is the fragmentated nature of the sector, as some water businesses are held within conglomerates. To capture the exposure, water funds often include those companies despite the relatively low percentage of cash flows generated from water.

We believe investors need to evaluate underlying holdings closely to ensure they are truly benefitting from the secular growth tied to increased investment in water infrastructure and technology.

WSR: How do water investments dovetail with ESG, sustainability and environmental concerns?

Grumhaus: Water investing is at the forefront of sustainability and environmental initiatives. Water represents one of the U.N. Sustainable Development Goals (#6), with a target of providing water and sanitation for all people by 2030. Investing in companies that address water scarcity, improve water quality and enhance efficiency contributes to reaching the U.N.’s target.

Additionally, the importance of investing in water related resiliency and recovery will grow as the world continues to feel the impact of climate change through water events, such as droughts, floods and rising sea levels.

While water has garnered less attention than greenhouse gas emissions to date, we believe this is changing. Evidence of this change is seen by sustainability leaders, such as PepsiCo, Microsoft and Google announcing net zero water targets by 2030. Investors are following suit, with investment into the water sector expanding significantly. From 2015 to 2021, assets in publicly listed water funds increased more than four times. 

Michael Madden, Contributing Editor & Research Analyst at Wealth Solutions Report, can be reached at mmadden@wealthsolutionsreport.com