Tareno Global Water Solutions Fund in October 2024

Home stretch: A volatile October in review

October is known as a month of heigh­tened volati­lity and this month was no diffe­rent. Global equity markets showed a mix of resili­ence and caution, with signi­fi­cant volati­lity amid changing economic indica­tors. Overall, while some markets reached short-term highs, market parti­ci­pants remained cautious, balan­cing optimism with caution about poten­tial downward correc­tions in the face of economic and geopo­li­tical uncer­tainty as the year draws to a close. Uncer­tainty was also heigh­tened by the upcoming US election and the poten­tial impact of a change in policy on infla­tion and interest rates. The reaction to the build-up of this narra­tive was a dramatic rise in long-term US yields.

The Tareno Global Water Solutions Fund posted a perfor­mance of ‑2.02% (W‑EUR tranche).

The month in the invest­ment theme of water

There was a lot for our little universe to digest. The earnings season was in full swing, with prono­unced swings in both direc­tions. The rise in yields, which is usually a diffi­cult environ­ment for small and mid-caps, and geopo­li­tics, which also has an impact on the water theme. Although generally only in the short term.

So, what has been on our minds in terms of earnings? Results were generally solid, which is not surpri­sing given the macro backdrop, which remains supportive. There was pricing pressure in some verti­cals, but much less than had been feared. It’s generally a positive surprise how well compa­nies can defend prices that have risen with infla­tion over the last two years. On the other hand, given the geopo­li­tical backdrop, it is not surpri­sing that the odd client has decided to shift their invest­ments a little to the right. Some names in our portfolio have had to revise their full-year guidance downwards, and the market doesn’t like it even if it appears to be a tempo­rary headwind.

Andritz, while meeting expec­ta­tions on profi­ta­bi­lity had to lower its outlook for the full year. The Manage­ment expects revenues to be slightly decre­a­sing instead of being stable. Despite long-term funda­men­tals remai­ning strong, the stock traded down ‑13% for the month.

A.O. Smith issued a negative 3Q24 report and cut both revenue and earnings guidance for 2024. Headwinds in their China business were the main reason behind the warning which is not entirely unexpected. The stock ended the month down ‑14%, which seems exagge­rated in view of the strong growth profile of AOS. Given the likeli­hood of further stimulus for the Chinese economy, we decided to add to our position.

It took in general little to move prices lower. If it wasn’t for an earnings report, it was for the rapid rise in yields we saw in antici­pa­tion of a Trump win. The 10year yield moved up from around 3.70% to 4.30% within four weeks. That’s tough to digest for small and midcaps.

Positive highlights

Everyone deserves a good scare at Hallo­ween, but not all the reports were bad. Mueller Industries once again surpassed expec­ta­tions, achie­ving double-digit revenue growth and genera­ting $230 million in opera­ting cash flow. The company’s cash reserves have quickly rebounded to $970 million, about 10% of its market cap, only a months after spending $575 million to acquire Nehring Electrical. Follo­wing this strong report, the stock rose by 12%.

Itron was the #2 in terms of contri­bu­tion as their shares advanced 8% on the day of their earnings report. Manage­ment lifted guidance for the full year as the demand for their metering products remains strong across all markets and geogra­phies. We remain convinced, that the digita­li­sa­tion of networks has a long runway.

Policy and progress

Two topics that caught our atten­tion:

The EPA (U.S. Environ­mental Protec­tion Agency) issued a final rule requi­ring drinking water systems across the US to identify and replace lead pipes within 10 years. The rule also requires more rigorous testing of drinking water and a lower thres­hold requi­ring commu­ni­ties to take action to protect people from lead exposure in water. There are about 9 million homes that still get their drinking water through lead pipes. The cost to replace them is estimated to as much as $90 billion.

Britain launched an indepen­dent review to address water sector crises, aiming to streng­then regula­tion, increase invest­ment, and resolve systemic issues after pollu­tion scandals and public outrage. This comes right at the time when the regulator is expected to decide on the tariff hikes reque­sted by the industry. While this will test investors patience near-term, it might finally help to increase visibi­lity in the sector.

Looking ahead

As the year-end nears, markets will closely watch upcoming events, inclu­ding the U.S. election and global geopo­li­tical develo­p­ments. Despite the uncer­tain­ties, there remains reason for optimism. As an old friend would say, “The worst is not always inevi­table.”