Investment Idea

Pure liquidity for the portfolio

mikael bild.jpg
Mikael Syding
23 Oct 2020 | 3 min read

Is access to clean drinking water a human right? In that case, whose obligation is it to provide the water?

Is access to clean drinking water a human right? In that case, whose obligation is it to provide the water?

In the wake of the housing and financial crisis of 2008, that film The Big Short with Christian Bale (the "Batman" movies and "American Psycho") received well-deserved attention for its apt documentation of the anatomy of the crisis and its key figures. In the afterwords, one could read that the main character, the brilliant and autistic doctor and hedge fund manager Michael Burry, after the extremely successful mortgage bond dispute, focused his investor interest on water.

Access to clean water is one of humanity's great challenges, which is getting worse with a growing population, increasing meat consumption and e.g. wear-and-tear mentality in retail. Climate change also contributes to increased water shortages, especially in already vulnerable and poor areas.

Housing, food, water and social context are vital to us humans, and are therefore classified by many as human rights. But for something to be a right, there must be someone who has it as an obligation as well. Since it is unreasonable to impose the requirement on individuals and companies, it must be assumed that it is humanity in general that has an obligation to provide e.g. water to anyone who cannot handle it themselves. In practice, it is states and governments that assume the obligation. At the same time, any individual or company must physically produce the water itself at a reasonable cost and sell the water on to the institutions that represent the part of humanity that has taken on the obligation to fulfill people's perceived right to clean drinking water.

When something with limited supply and great value has zero in price (a definition of "right"), there is quickly a shortage of the product. Michael Burry realized this early on and began to take a position thereafter, i.a. in the company Global Water Resources. Earlier this year, he seems to have had some pangs of conscience and then expressed hesitation about trading in water futures, perhaps because the California futures NQH2O tripled in price during the second quarter of this year. However, water does not become cheaper or more accessible because human rights are being moralized. What is required are investments and innovations, which are driven by economic motives. Buying water futures and shares in water companies is the most powerful way you as a private person can contribute to more people having their need for water met.

If you think that water investments are as lucrative as important, you can get a broad exposure to the water industry via the Vontobel Strategy Certificate on the Vontobel Aqua Index, which incidentally reached a new high recently. The index currently consists of 36 almost equilibrium companies (from 3.3% to 2.4% in addition to two investments of 2% and 1% respectively). The index has three focus areas:

1) water production and storage

2) infrastructure such as dams, waterworks and treatment; measurement

3) process control and efficiency

The six largest holdings right now, with weights of at least 3 percent, are Advanced Drainage Systems, Itron, Hannon Armstron, IDEXX Labs, Xylem and Tetra Tech. Take it easy if you do not know the names, that's a bit of a point. You are responsible for the decision to position yourself in water, driven by both ethics and economics, and Vontobel is responsible for the dynamic selection of the leading companies in the sector.

Although it has been a long time since Dr. Burry's interest in water became widely known, it may still be early days for investment in the sector. In the last few years alone, ESG funds have grown rapidly in number and size. Their assets are growing faster than the perceived availability of relevant investment options. This is where the water comes in. The global water market is estimated to amount to 600 billion dollars per year, and according to some estimates, half the world's population will live in areas with water supply problems in five years. Already today, 660 million people lack clean water, while 2.4 billion have no or inadequate sanitation facilities. Water and water companies thus become obvious investment objects for the rapidly growing ESG funds. Thus, you may financially benefit from a wave of liquidity into the sector while helping to reduce problems with disease, malnutrition and dehydration for the planet's weakest. Provided you are willing to take the investment risks.

How liquid is your portfolio at present? Maybe water resources can satisfy both your need for uncorrelated investment and your obligation to contribute to humanity's most important right?