JUNO INVESTING ©

An Investment in the Pipeline

JUNO INVESTING ©
An Investment in the Pipeline

 

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AUTUMN 2017

By Brenda Ward

“Water is a scarce commodity,” says Pathfinder’s John Berry. “Less than 0.01 per cent of the world’s water is in sustainable lakes and rivers.”

Portfolio manager, Paul Brownsey adds: “Ninety-seven per cent of all water is in the sea. And a lot of freshwater is locked up in ice and marshlands.”

Access to water is a problem for many of the world’s poorest countries, but it can be an opportunity for investors with a conscience.

Climate change is bringing a ‘big dry’ to some areas and floods to others, so the infrastructure supplying fresh water to the world’s growing population is critical. Companies making and selling that equipment are becoming more valuable, say the pair.

Pathfinder Asset Management launched its niche global equity fund, The Pathfinder Global Water Fund, more than six years ago. It offers Kiwis an investment in water utilities, and in companies making the piping, pumps, and high-tech water-metering equipment that keeps water flowing to the world’s population.

Their goal is to make you money while your investment promotes efficient use of this precious resource in communities around the world. 

An investment that does good

“This is a socially responsible investment,” says Berry. “We’re looking for an investment where people can do good and do well at the same time.

“Driving the investment thesis is that the world’s population is both growing and moving to cities. As communities grow they need access to more food (which is water intensive to produce) and more clean water. In relation to populations moving to cities, the pendulum swung in 2010 – from then, more of the world’s population has lived in cities than in rural communities. This is important because cities are heavier users of water than rural communities.

“Many fast-growing cities are in emerging markets, where they need to build the water infrastructure.”

The fund’s goal is not to invest directly in the water resource, but in the industry that distributes water safely to people’s homes and workplaces, and to factories.

“I liken it to the gold rush,” says Berry. “We want to be the person selling the picks and shovels, not the person digging for the gold.”

Listed companies only

The fund invests only in companies that are listed on share markets. These are mostly utility companies, or industrial firms that produce water pipes and pumps and desalination and purification equipment. 

Water utilities have always been a stable investment, say the pair. But in emerging countries where water networks are sometimes starting from scratch, you may be surprised to know they’re high-growth companies. 

The fund’s investments are spread around the world, with many in the US, and others in China, Europe, and Britain. Many companies are high-tech, while others are more traditional. The fund invests in between 50 and 100 stocks, but generally there are about 60 at any one time, with the largest comprising about 6 per cent of the fund.

Among the companies held are:

•    Brazilian behemoth Cia Saneamento (SBS on the share market), which supplies water and sewerage services to around 25 million people.

•    Xylem, which makes water-flow equipment such as pumps, treatment, and testing equipment distributed in the US, Europe and Asia/Pacific (including New Zealand).

Ethics and risk

Pathfinder does rigorous research into all the companies in the fund to ensure that they fit ethical criteria and that none of their sources of revenue are inappropriate. They have recently engaged specialist global research firm Sustainalytics to assist with the environmental, social, and governance analysis of companies in the fund. 

The pair say recent publicity about KiwiSaver funds investing in controversial weapons manufacturers has given Kiwis a heightened awareness of ethical issues.

“This is our first social responsibility fund – but we will launch another,” says Berry.

There are risks in the water industry. They include water availability due to weather, government regulations changing, and levels of infrastructure spending. 

Berry says President Donald Trump is about to increase infrastructure spending in the US, and water infrastructure could well be part of that. Water infrastructure across the US is up to 100 years old and much of it needs replacement, he says.

Fees for the fund are a 1.3 per cent all-in fee, which covers everything. The charge can be broken up into a 1.09 per cent base management fee and 0.21 per cent costs. 

There are no performance fees in any of the Pathfinder funds. “As manager we personally invest in our funds rather than charge performance fees. We believe this gives the best alignment of interest with our investors,” says Berry.

In Brief

•    Product: Pathfinder Global Water Fund

•    Launched: June 2010 

•    How it works: The Water Fund is a ‘macro-manager’, following global trends, rather than researching each individual company. It identifies indexes that comprise listed stocks earning a high proportion of their revenue from the water industry. It weights the selected indexes and combines them into a single portfolio. It screens stocks against socially responsible investment rules. The fund has around 60 stocks at one time.

•    Offerer: Pathfinder Asset Management Ltd  

•    Manager: Paul Brownsey and John Berry. Pathfinder Asset Management is overseen by a board of four directors.   

•    Minimum investment: $10,000, in the Product Disclosure Statement. However, this is negotiable and the company has the discretion to take smaller investments.  

•    Performance: The average annual return for the last 5 years is 12.1% per annum after fees.

•    Fees: 1.3 per cent all-in fee. No performance fees.

•    What we like: The performance. With the five-year return at 12.1 per cent after fees, it outperforms a water index in the United States which has returned 8.8 per cent over five years. It’s a theme people can easily understand, and if you’re looking for a socially responsible investment, there are not many similar products. Being a global fund, it’s good for diversification.

•    What we don’t like: Returns may be positive or negative, as with any investment. It’s useful if you want international equity exposure, but it’s not a ‘put all your eggs in one basket’ investment. It would best be used in conjunction with, or to complement, another investment. 

•    Conclusion: If you’re looking for an ethical investment, this one ticks the boxes, because water industries are bringing safe water to many underdeveloped countries. The spread of 60-odd stocks offers a broad base, across many economies. However, it’s best to use as an add-on to an existing portfolio, rather than as a sole or major investment.