BNP Paribas Investment Partners (BNPP IP) has launched a sterling hedged share class of the BNP Paribas L1 Equity World Aqua fund (The Aqua Fund), making the strategy available to UK retail and institutional investors.
The Aqua Fund, providing exposure to the water sector value chain, is managed by Impax Asset Management’s senior portfolio manager Hubert Aarts.
Impax AM is the specialised environmental investment partner of BNPP IP.
The strategy invests in companies that operate in construction, renovation and maintenance of water supply facilities, technologies and systems for water treatment and decontamination.
It comprises 45 stocks and seeks to outperform the MSCI World.
In a press briefing on 4 March in London, Aarts debunked “three myths” regarding the Aqua Fund.
“It is not a water utility fund nor a sector fund only invested in water utilities and it is not more risky than other strategies,” he said.
The global water market is currently estimated at $600bn and grows around 7% a year according to Impax’s figures.
Also among the $41trn cumulative investments projected in global infrastructures between 2005 and 2030, water represents the largest sector with some $22.6trn investments expected over that period.
Aarts outlined four secular drivers : EM urbanisation and growing populations, underinvestment in developed markets infrastructure, regulation on water quality being tightened and the adaptation to climate change.
The portfolio manager considers water scarcity as an opportunity as it will notably lead to tighter regulation on water.
The launch of new technologies has offered new investment opportunities Aarts stressed , that include water re-use, desalination, leak detection, water saving or flow measurement.
Commenting drivers in the water utilities sub-sector, Aarts said that a favourable regulatory backdrop provides attractive environment for capex in the US. He also mentioned forthcoming regulation on water by 2020 in the UK, where he sees a strong inflation linkage built in.
Aarts said China, in this sub-sector, provides return on equity of 8-10% and that rises. Impax’s manager added he stays away from Brazil for the moment because of local water companies’ large debts.
Aarts explained the M&A activity in the water sector has been significant in 2015, highlighting last August’s acquisition of Pall by Danaher, first holding of the Aqua Fund (3.7%) as at end 2015.
About the current positioning of the fund, Impax’s senior portfolio manager said it was 55% defensive and 45% cyclical. As per sector exposure, as at 31 December 2015, the fund was invested at 55% in water infrastructure, 23% in water utility, 20% in water treatment and 2% in cash.
Weigthed average market cap was €9bn and P/E ratio was 17.4.
“‘Industrial’ stocks have performed well in 2014 with margins having recovered from the crisis. We have been more defensive in 2015. We moved money from water treatment companies, especially Asia headquartered ones. We invested a bit more in water utilities firms such as American Water Works,” Aarts commented.
Top 10 positions of the Aqua fund at end 2015 were : Danaher Corporation, American Water Works, Toro Company, Xylem, HD Supply Holdings, Ecolab, Agilent Technologies, Suez Environnement, Pennon Group and Aqua America.
The fund’s volatility was 0.9% and its tracking error reached 4% at end 2015. Aarts argued the tracking error can be explained by the difference in average market caps and sector exposures with its benchmark, the MSCI World.
Aarts said he does not believe in passive management in the water theme as it would not be as flexible as an active management. He added the top 10 positions of a water ETF would certainly be occupied by the largest water utilities companies in the world.
Impax Asset Management had €3.1bn of assets under management as of end December 2015.
BNPP IP totals €530bn in assets as at end of last year.