Tareno Global Water Solutions Fund in October 2024

October is known for its market volatility, and this year was no exception. Global equity markets experienced significant volatility, influenced by changing economic indicators and geopolitical uncertainties. The Tareno Global Water Solutions Fund was characterized by a challenging reporting season and the impact of rising long-term US yields on small and mid caps.

Water Fund Report

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.”

 

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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.

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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