Water Fund Review May: +3% perfor­mance

May 2024 – The gateway to summer

Global equity markets surged to new highs at the begin­ning of May, reboun­ding from the April downturn. This uplift was fueled by better-than-expected earnings reports, robust economic data, and incre­a­sing optimism for early interest rate cuts, follo­wing a decrease in April’s infla­tion rates to 3.4% in the US, 2.3% in the UK, and a steady 2.4% in the Eurozone, which sustained a healthy risk appetite. However, the rally was inter­rupted when the minutes from the latest Federal Reserve meeting indicated that the committee is looking for more substan­tial progress. Several months of decli­ning infla­tion might be needed before a rate cut becomes viable. As interest rates began to rise again, the equity markets had to relin­quish some of their earlier gains. Despite this, it was still a positive month overall for the markets we focus on, parti­cu­larly in the US and Europe, though less so in Asia and Japan.

The Tareno Global Water Solutions Fund posted a perfor­mance of +3.02% (W‑Euro Tranche) in May.

Our month in water – The Final Cut

As May draws to a close, so does the earnings season for our portfolio. The results mirrored the unpre­dic­ta­bi­lity of nature, with periods of both rainy weather and sunshine. Let’s delve into some of the standout reports.

Geberit surprised analysts with better-than-expected volumes and margins, demon­st­ra­ting robust manage­ment execu­tion in challen­ging market condi­tions. Selec­tive restocking by whole­sa­lers was cited as a key driver of this positive surprise. Given that Watts Water operates in the same end markets, we decided to increase our stake. Watts comfor­tably surpassed expec­ta­tions, yet their decision not to raise the full-year guidance somewhat dampened the excite­ment. However, the decision proved advan­ta­geous. Should they maintain their Q1 perfor­mance, they may revise their guidance upward in the summer.

Itron, a major player in metering techno­logy, had an impres­sive quarter, mirro­ring its compe­titor Badger Meter with an EPS that exceeded consensus by over 40%. The market responded positively, and Itron’s stock ended the month up by 15%. Similarly, Advanced Drainage Systems saw its shares climb 9% after also surpas­sing expec­ta­tions, with EPS coming in 20% above the consensus driven by strong demand for their plastic pipes and drainage systems. This upbeat demand was echoed by peers such as Georg Fischer and Wiener­berger.

While the earnings season was generally positive, there were some disap­point­ments. Ebara, for example, failed to meet elevated expec­ta­tions and saw its stock decline by 14% post-report. Despite being one of the best perfor­mers year-to-date, its momentum has paused. Another setback in May was largely political; UK utili­ties experi­enced a sharp sell-off after Prime Minister Rishi Sunak announced a surprise election in July. Severn Trent, United Utili­ties, and Pennon were parti­cu­larly affected, as water is often a conten­tious issue in elections. While the market’s reaction seemed exagge­rated, we prefer to await a calmer environ­ment before reinve­sting in these names.

Keeping Up the Dialogue

We parti­ci­pated in several confe­rences throug­hout May, prima­rily encoun­tering European compa­nies. A notable obser­va­tion was the increased presence of overseas investors at an Italian confe­rence this year, signaling a growing interest in the region. Among the compa­nies, ACEA Spa stood out. As a multi-utility managing Rome’s water distri­bu­tion, they are explo­ring asset disposal and pursuing higher-return projects, such as Waste-to-Energy. ACEA, with a strong customer growth record, solid manage­ment, and a robust balance sheet, trades at 12x PE and offers a 5% dividend yield. They  a top-10 holding, and I am inclined to buy on any dips.

A meeting with Webuild left me optimi­stic about the actua­lization of infras­truc­ture invest­ments in the water sector. Italy is poised to signi­fi­cantly expand its desali­na­tion capacity, a critical move to combat water scarcity, parti­cu­larly in the southern regions. As a leader in construc­ting desali­na­tion plants, this could play out well for the company.

Another produc­tive discus­sion was with Georg Fischer. With Piping and Flow Solutions now genera­ting about 65% of revenues, the full integra­tion of Uponor should substan­ti­ally enhance margins. GF antici­pates signi­fi­cant growth in its water business, targe­ting sectors such as battery produc­tion, data center cooling, offshore wind farms, direct lithium extra­c­tion, storm­water manage­ment, and green hydrogen.

Stay Invested

The adage “Sell in May and go away” did not hold true this year. However, it remains crucial to focus on diver­si­fi­ca­tion, especi­ally as we antici­pate heigh­tened volati­lity over the summer. We have bolstered our defen­sive positions in the portfolio, adding shares in sectors and regions likely to exhibit resili­ence. We increased our holdings in European small and mid-caps, which tend to perform well when interest rates are cut, adding to positions in Metso, Webuild, and Veolia. In more defen­sive markets like Switz­er­land and the UK, we invested in Geberit, Georg Fischer, and Halma. In the US, we expanded our stakes in environ­mental and infras­truc­ture consul­tan­cies Jacobs Industries and WSP.

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