Fund Manager Review October 2023

Foto Sanfte Wellen auf Wasseroberfläche

Mind the Bogeyman

October was really a bad month for financial markets. The list of concerns was a long one: excessive inflation, possible additional Fed tightening (or at least higher rates for longer), increasing federal budget deficits bringing ever-larger supplies of new Treasury issuance, rising geopolitical concerns, a possible near-term recession, and the specter of a federal government shutdown (yes, again) on November 17.

Long-term Treasury securities saw a sharp drop in prices, with the 10-year yield reaching 5% (last seen in 2007) and equity markets also struggled. The S&P500 fell by 2.1%, the Nasdaq dropped by 6.4% and the small-cap Russell2000 Index was down 6.1%.

The MSCI Europe ex-UK Index declined 3.3% on the month, as cracks continued to emerge in the economic outlook for the eurozone. In the UK the FTSE All-Share fell 4.1% as higher interest rates appear to be biting. Japanese equities struggled as well, with the TOPIX Index falling by 3.0 percent, despite weakness in the yen.

The Tareno Global Water Solutions Fund achieved a performance of -4.93% (R1 EUR).

Water fundamentals

Industrial Channel:

The industrial sector is performing well, driven by reshoring initiatives and industrial pretreatment. This has helped demand remain strong despite challenges in the broader economic landscape. While some niches, like healthcare and life sciences, show signs of slowing, the overall outlook for the industrial channel is favorable.

Municipal Channel:

In the short term, the municipal channel is stable, with backlog burn continuing. However, there are concerns on the horizon, as sentiment is starting to shift negatively, and the impact of recent interest rate spikes remains uncertain. The water/wastewater and environmental sectors have seen declines in project activity, indicating potential challenges ahead.

Construction:

Residential demand is decreasing, likely due to rising interest rates. Non-residential construction, surprisingly, remains resilient. However, there are indications that this sector may also face challenges in the near future. The Architectural Billings Index dropped significantly in September, signaling potential difficulties ahead.

Agriculture / Irrigation:

The agriculture sector is facing headwinds from lower commodity prices. Corn prices are notably lower than a year ago, impacting demand for ag equipment.

Our month in water

October is a heavy month for earnings in the water space. Most results came in better than expected, but the sometimes clouded outlook in some cases led to erratic market reactions. There were solid reports from Badger Meter (higher margins, but already reflected in the price), Mueller Industries (beat expectations, upping estimates), A.O. Smith (beat expectations and raised guidance) and Gorman Rupp (strong revenue growth and increased margins). There were more muted reports from Pentair (in-line, but guidance trimmed), Franklin Electric (tepid results and lowered guidance), Xylem (below consensus on weaker margins) and Ecolab (bottom line missed, but revenues were strong).

Earnings left aside the top contributors in October were the water utilities Severn Trent (+12%) and United Utilities (+11%). UK water companies published their business plans for the 2025-30 period and the step up in investment (mostly to reduce sewer overflow due to stormwater) was well received.

Everyone deserves a good scare on Halloween

Ours came from Valmont Industries, a leading supplier of irrigation systems globally. Back in 2021 they invested about USD 300M to acquire an ag-tech company named Prospera. The idea was to integrate AI technologies with center pivot irrigation to develop real-time crop analysis. At their capital markets day in May, Valmont gave an upbeat outlook for their ag-tech business giving the impression that growth is exceeding expectations. Fast forward into October, Valmont missed expectations as they took an impairment charge on Prospera (almost halve the amount they paid for it). Management mentioned slower growth and adoption rates than initially planned. The stock lost almost 15% on the day as a consequence.

We decided to start exiting the position as it will take management some time to rebuild trust. We trimmed positions in Badger Meter and EVN AG in order to take some profit. We used part of the proceeds to build positions in Masco (plumbing supplies) and Idex (fluid handling).

Download PDF

Portrait Stefan Schütz

Do you have any questions about the report or would like to find out more about the Tareno Global Water Solutions Fund?

We would be delighted to hear from you.

Disclaimer

This information is not intended as an offer or solicitation with respect to the purchase or sale of shares of the Variopartner SICAV-Tareno Global Water Solutions Fund. Please be aware that investment funds involve investment risks, including the possible loss of the principal amount invested. For a detailed description of the risks in relation to each share in the investment fund, please see the prospectus. Investments of the Luxemburg Variopartner SICAV-Tareno Global Water Solutions Fund should be made due to the fund’s latest prospectus, the statutes, the latest annual report and, if applicable, the half-yearly report. These documents are available free of charge from the domicile of the fund at 33, rue Gasperich, L-5826 Hesperange, Luxemburg, or from Vontobel Fonds Services AG, Dianastrasse 9. CH-8022 Zürich, Switzerland and Bank Vontobel AG, Zürich, Switzerland.

Images: Jürg Kaufmann, Marijke Vosmeer, Istock, Unsplash, Pixabay