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.

Would you like to learn more?
Do you have any questions about the report or would like to find out more about the Tareno Global Water Solutions Fund? Please do not hesitate to contact us.
Responsible
Stefan Schütz
Fund Manager
s.schuetz@tareno.ch
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.
Bilder: Jürg Kaufmann, Marijke Vosmeer, Istock, Unsplash, Pixabay