Water Fund Review March 2024

Resili­ency and Oppor­tu­nity in March

The positive momentum gained in February continued in March and as the curtain falls on the quarter, the finan­cial landscape presents a narra­tive of resili­ency and oppor­tu­nity. Developed market equities had a strong first quarter thanks in large part to the perfor­mance of growth stocks. This was especi­ally true in the US, where the S&P 500 rose 10.6%, outper­forming most of its peers. However, the best performing market of the quarter was once again Japan. The TOPIX ended up 18.1% in the first three months of the year, despite the Bank of Japan raising interest rates for the first time since 2007, ending the world’s only negative rates regime and other uncon­ven­tional policy easing measures enacted over the course of the last few decades to combat defla­tion. While some European equity indexes, such as the French CAC 40, reached new all-time highs, European equities overall continued to lag the US and Japan. However, European stocks ended the quarter on a brighter note as global investors, concerned about the concen­tra­tion risk of the US market, started to turn to Europe where valua­tions look more reasonable.

The Tareno Global Water Solutions Fund posted a perfor­mance of 4.85% (W‑Euro Tranche) in March to close the quarter with a solid perfor­mance of 11.75%.

Our month in water – Valuable insights

We had the oppor­tu­nity to meet many compa­nies from our universe thanks to two confe­rences held by Kepler Cheuvreux and North­coast Research. We engaged with US and Swiss names on market trends, the outlook for pricing in an environ­ment of easing infla­tion, the impact of fiscal spending and last but not least the reporting on ESG metrics. While this is often dismissed as a mere forma­lity, we see signi­fi­cant oppor­tu­ni­ties here to help compa­nies enhance their ESG profile.

Now, what did we learn from the meetings we had? First of all, the long term drivers are still very much in place (popula­tion growth, urbanization, and climate change). Since “water” is a very local issue, there is no “one strategy fits all needs”, which means that there will be way more tasks to complete than compa­nies are able to handle. The order book just keeps growing. Now on top, there are several factors that are starting to unfold. The growing aware­ness of the importance of water reuse. It makes so much sense to reuse water instead of just treating it up to drinking water standard and release it into the ecosy­stem. Storm­water manage­ment is another topic gaining traction. We heard Advanced Drainage Systems talk about the strong demand they face for their drainage pipes. Another timely topic is A.I., which requires two things: Chips and Datacen­ters. Chip manufac­tu­rers need ultra-pure water to produce chips. The water needs to be treated, monitored, and handled throug­hout the process which requires a lot of exper­tise. The datacenter just needs a lot of cooling, where water is the main compo­nent. Here again, a lot of infras­truc­ture is needed. Georg Fischer, was parti­cu­larly vocal about the demand they see for their piping products from A.I.

Rising like rockets, falling like feathers

One topic that came up in almost every discus­sion is pricing. How long will prices stick in an environ­ment where infla­tion is cooling? It was kind of surpri­sing to always get the same message: “There is no pressure to lower prices, but we won’t probably raise as much this year.” This is defini­tely not what we would have expected 2 years ago. An article from the Wall Street Journal delved into this question lately and concluded that prices escalate sharply but decrease slowly because compa­nies are quicker to pass on rising costs to custo­mers than to offer price reduc­tions when costs fall. This dynamic is central to under­stan­ding why the cautious predic­tions regar­ding corpo­rate margins did not materia­lize so far.

11.75% YTD, what now?

Would this be the December report, I would thank Mr. Market for a nice perfor­mance, but we are only a quarter into the year. The global econo­my’s strength and the possi­bi­lity of interest rate reduc­tions in the latter half of the year might sustain the current trend, yet certain markets seem overly optimi­stic, leaving them vulnerable to correc­tions. Markets are conti­nu­ally exposed to various economic, environ­mental, political, and geopo­li­tical uncer­tain­ties, all of which could intro­duce increased volati­lity. There­fore, diver­si­fi­ca­tion is key. The good news is that the water universe has ample choice to diver­sify.

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