Global water crisis: Investing in water

The water on the planet now is the same water that dinosaurs were drinking—and it's the only water that will ever be here.

Oceans account for 97% of Earth's water. Most, 2.5%, of the planet's fresh water, is locked in the polar ice caps, in the soil, or irreversibly polluted. That means, as of now, 0.5% of all the water on the planet is potentially usable by people, animals, and plants.

"The global water supply is finite and there is no new water," says Janet Glazer, portfolio manager for the Fidelity^® Water Sustainability Fund (). The fund invests in companies that are helping drive greater efficiency, extending the lifecycle, improving infrastructure, and developing disruptive technologies.

Viewpoints caught up with Glazer to talk about the potential investment opportunities in water and why doing good for the planet can be good for investors.

What are the trends driving the increasing need for water sustainability?

I think we're at a tipping point when it comes to global water scarcity. The 3 main problems exacerbating the crisis of water scarcity include the lack of sufficient infrastructure, a booming population, and climate change. These factors are going to put an enormous strain on an already fragile water system.

The world's population is expected to increase by 2 billion over the next 30 years to almost 10 billion. People are already dying from lack of clean water and sanitation and the situation is expected to get worse.

• One in 3 people (2.2 billion) lack access to safe, readily available water.¹
• Six in 10 lack safely managed sanitation.²
• 2 million people, mostly children, die every single year either from lack of water or from disease they got from tainted drinking water.³
• 2.7 billion people live without access to fresh water at least 1 month per year.⁴

The good news is that there has been some progress. Since 2000, 1.8 billion people have gained access to drinking water services and 2.1 billion have gotten access to basic sanitation services.⁵

But severe climate issues are exacerbating the risk. For example, Lake Mead, North America’s largest manmade water reservoir, serves as the primary water source for many states, including California, Nevada, Arizona, and New Mexico. It is now at unprecedented lows in terms of capacity, causing widespread negative impact on both people and agriculture. The same factors impacting the global water scarcity issues—drought, climate change, and a massive demand pull on a precious resource—are causing a dire situation in the south and west United States.

Because of situations like this, we're seeing increasing demands from governments around the world asking for help—in particular, help from private companies. That's because there's an immediate need to address the health and safety of global populations while public budgets and spending are under pressure.

Are there any specific companies and industries that you think stand to benefit? And why?

Neptune Technology is a business inside of Roper Technologies (). They are a leader in the smart water metering space and serve more than 4,000 water utilities across North America.

Water meters are remarkably complex and there has been a migration from manually reading meters to automatically reading meters. AMI (Advanced Metering Infrastructure) involves digital meters that have 2-way communication so utilities can communicate with consumers to help them save energy and reduce costs. A smart water network can even help find leaks or tampering.

This is a big opportunity as there are only a handful of big players that dominate. In fact, 40% of the space has yet to be penetrated. So the growth runway is there.

What are companies doing to help solve the water scarcity problem? What more can they do?

There are so many different companies globally helping to combat the water-scarcity crisis—from a variety of sectors too. They are developing new treatment technologies, smart water networks, desalination systems, non-revenue water products, metering solutions, outsourcing systems, and testing equipment.

Water treatment involves the treatment of water and wastewater through its life cycle to remove harmful contaminants and the buildup of harmful deposits.

Evoqua () is an example of a company that may benefit from the need to remove chemicals including PFAS (aka "forever chemicals") from our water. They have a full suite of technologies such as reverse osmosis, ion exchange, granular active carbon, and oxidation processes. This is a growing pipeline of opportunity for them with heightened awareness from government.

In terms of smart software and digital applications, Danaher () is one example. It owns Hach, which produces the Claros water software platform that provides water intelligence for customers to help with regulatory compliance, cost savings, and equipment maintenance. Their system enables customers to collect, access and share data, as well as remotely manage treatment processes efficiently in real time, 24/7. The last example has to do with smart infrastructure. Due to insufficient and old infrastructure, about 30%– 40% of water worldwide becomes non-revenue water according to the International Energy Agency. Non-revenue water is water that is lost due to leaks in the pipes, unauthorized use, corruption, or inefficiencies. This is where a SmartBall^TM technology from a company called Xylem () comes in.

In 2015, Rand Water, the largest water utility in Africa embarked on its largest pipeline condition assessment investigation, examining a little over 2,200 kilometers of Rand's high pressurized pipeline network. They used Xylem's SmartBall^TM, which is a multi-sensor tool used to detect and locate the acoustic signatures related to leaks and gas pockets. It helped find a solution to a costly problem that was impacting Africa's largest water utility.

What does this mean in terms of growth and profitability?

It's estimated that industry revenue could grow 4%–6% per year for a long time and, I think, companies that are able to innovate and provide new science, technology, and intelligence-enabled solutions will grow by multiples of that rate.

It encompasses a global and diverse set of businesses. I think quality companies with strong management teams working on the high end of the water technology curve are set to dominate with stronger growth, margins, and valuations over time.

(Read Viewpoints on Fidelity.com: What is megatrend investing?)

What do you look for in a company you're considering for the fund?

There are a lot of things I think about when considering what to own in the fund but I think there are 4 main elements I focus on.

1. Capital allocation. I look at how well the company generates free cash flow and how well it has allocated capital throughout its history.
2. Management strength and company processes, values, and culture. I'm aiming to find businesses where there is a very disciplined approach with a lot of autonomy to enable nimbleness.
3. Industry dynamics and types of businesses the companies play in. In particular, I think about how wide moats are, how commoditized the businesses are, how durable the growth is, how much capital is needed to grow, how do they compete and segment their markets—and how all of this has resulted in a strong financial model.
4. Innovation and how they think about existing competencies versus disrupting new norms. And are they being surgical in the areas they go after vs. a holistic "build it and they will come" mentality.

Are there any specific risks associated with investments in water sustainability?

While the secular theme of water scarcity is powerful, the companies do have cyclicality by virtue of the end markets they are exposed to as well as geographies and regions where they have a presence. I try to minimize those risks in the fund with deep, fundamental research.

What is your outlook for the water industry and its quest to help solve the world's water challenges?

I have a very positive outlook for the water industry as it relates to growth of innovation and new technologies that will aid in solving some of our biggest water challenges like water scarcity, resilience, and affordability.

I think Americans tend to focus on the US, but when you expand the aperture to the globe, in countries like India or China where water is a top priority, you see the government commitments to investing in both operating and capital expenditures.

That being said, my optimism is grounded in a very realistic view on the global crisis that is in front of us today, making the call to action more important now than it ever has been.

Fidelity^® Water Sustainability Fund: Top 10 holdings

ROPER TECHNOLOGIES INC () 

PENTAIR PLC 

TELEDYNE TECHNOLOGIES INC ()

TETRA TECH INC () 

SEVERN TRENT PLC

VEOLIA ENVIRONNEMENT 

MUELLER WATER PRODUCTS INC A ()

INGERSOLL RAND INC () 

IDEX CORPORATION ()

GEBERIT AG (REG)