Fund Manager Review January 2024

“Waiting for Godot”

After the robust rally in the final month of 2023, stock markets took a breather early in January, only to reach new highs on the back of strong tech earnings and expec­ta­tions that the Federal Reserve might announce a reduc­tion in interest rates (Godot?) early in the year. However, these antici­pa­tions were quashed when, at the January 31 meeting, Chairman Jerome Powell offered a more cautious outlook. Although he recognized impro­ve­ments in employment and infla­tion towards a more favourable equili­brium, he asks Didi and Gogo to be patient. A rate cut in March is unlikely to be the primary scenario.

While developed markets enjoyed positive returns (the Topix Index in Japan stood out as January’s best-performing market), emerging markets faced steep declines, exacer­bated by the robust US dollar. Leading the downturn, China experi­enced a 10% drop, marking it as Asia’s poorest-performing market for the month. The nation strug­gles with defla­tion, low consumer confi­dence, and an oversupply in its property sector. Moreover, the absence of a signi­fi­cant inter­ven­tion from the Chinese govern­ment has left investors disen­chanted.

The Tareno Global Water Solutions Fund posted a perfor­mance of ‑0.56% (W‑Euro Tranche).

Our month in water: Mixed results from the sectors

Looking at regions and verti­cals in our universe, the picture is mixed. While like in the broader indices, Japan was the best performing region (prima­rily Ebara and Kuraray), the US were unlike the broad indices a drag on perfor­mance. Most of the downside came from US utili­ties. They faced selling pressure (American States Water, American Water­works) as interest rates started to move higher again. Nothing funda­mental here, just pure momentum. The strong perfor­mance of European utili­ties (Veolia, ACEA, United Utili­ties and Severn Trent) was more than offset by weak perfor­mances in the construc­tion vertical. Sika, Geberit, Georg Fischer and Aalberts took a beating as weaker than expected earnings let consensus to lower expec­ta­tions.

Earnings season started late in January and the first couple of reports did not bear major surprises. Stocks tended to be weak after the report, which is not unexpected given the perfor­mance in the fourth quarter of last year. Just to pick one: A.O. Smith, a supplier of water-heater and in-house water treat­ment systems. AOS is one of the water universe’s most compel­ling growth stories for various reasons. They do have 30% of their revenues coming from China. Given the low base, their China business is viewed as a major wild card going into 2024. Now, the results and the outlook were kind of uninspi­ring. They had some headwind from pricing in the US, which made results look a little soft. The silver lining though was an increase in Chinese sales of 4.2% despite considerable forex headwind. Despite the China story unfol­ding favorable, the stock is down some 5% since the release.

From the shop floor

M&A was in the spotlight right from the begin­ning of 2024. We are getting more and more questions about the impact of A.I. and digita­lization on the water space. While we do not expect the Nvidia-like growth prospects, the thematic is gaining momentum. With global warming and scarcity of water being a real threat, techno­logy-aided water resource manage­ment is the need of the hour.

The Swiss company ABB announced that it has agreed to acquire Canadian company Real Tech, a supplier of optical sensor techno­logy that enables real-time water monito­ring and testing. So far, ABB is a supplier of motors and controls for waste­water pumps, but has not been engaged in digital water. We will try to find out if this marks a new focus on water for them.

More relevant for us was the acqui­si­tion of Trimbles water monito­ring hardware and software business by Badger Meter for an undis­c­losed amount. Badger Meter is a 120 year old company that is mostly known for its metering products. Around 2020 they expanded outside of the metering space into digital water (IOT, software, quality monito­ring). While they are not the only metering company making moves like this, Badger is a poster child for a company that went from hardware into software with success – they trade at “tech-multi­ples” and are seen as an inspi­ra­tion to other compa­nies. We are invested with Badger Meter as we are convinced, that they are a compel­ling growth story going forward.

There were only minor adjust­ments made to the portfolio. Once the earnings season moves into full swing in February, we will have plenty of oppor­tu­ni­ties to move.

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