Impact Investing
Water ... Water Security Fund

The Best Way To Invest In Water? Interview With Thomas Schumann Founder Of Water Security Fund

Burgess COMMENTARY
Great ... clearly water is a critical component of a functional socio-enviro-economic system and should be a part of the impact investing world, but we should also be careful about the idea that the value of water related investments is because of profit potential when water is more importantly the source of life itself. My view is that the value of water related investments cannot be captured by the prevailing conventional metrics for profit and stock market value, and accordingly we need to be able the number the value of water by reference to the value of life as well as merely by reference to the potential for profit. When we do this, the value of a fund like the Water Security Fund could increase in a really meaningful way! Peter Burgess http://truevaluemetrics.org
Peter Burgess

The Best Way To Invest In Water? Interview With Thomas Schumann Founder Of Water Security Fund

This interview with Thomas Schumann Founder of Water Security Fund is part of ValueWalk’s Value Fund Interview Series.

Throughout this series, we are publishing weekly interviews with value-oriented hedge funds, and asset managers. All the past interviews in the series can be found here.

For the past three years, the World Economic Forum has identified water as the most important item in their agenda. Therefore, from China to the US, governments, organizations and companies across the world are unified in their focus on water security.

To capitalize on this trend, Thomas Schumann is following the world famous value investor and star of the Big Short, Dr. Michael Burry by launching the Water Security Fund in December 2016. Water Security Fund is an actively managed specialist water fund focused on water and water-related global equities. Due to water and its investor interest being a global long-term theme, Water Security Fund’s strategy includes U.S. on and offshore and UCITS vehicles.

Ahead of the fund’s launch, Mr. Schumann spoke to ValueWalk about the fund’s aims, its investment strategy and how he hopes the fund will improve the world’s water infrastructure.

Q&A With Thomas Schumann Founder Of Water Security Fund

To start could you tell our readers a bit about the Water Security Fund?

Water Security Fund is a global long-only specialist water fund which serves traditional and responsible investors seeking long-term capital appreciation and low risk in the growing $600 billion global water sector. The fund targets water and water-related equities of issuers that provide solutions to water supply (e.g. desalination, infrastructure), water quality (e.g. filtration, purification) and water efficiency (e.g. metering, monitoring, leak detection, conservation). Investing in water ensures social, environmental and financial impact for 7 billion stakeholders and protects national and global GDP. My five years in the global water space coupled with diligent research and analysis made me realize that water risk is the single largest threat to people, planet and profit. Hence, water security represents the single largest investment opportunity for decades to come. My findings of water risk and the importance, urgency and need for water security are echoed by all global humanitarian, financial and governmental institutions.

What will be your process for selecting investments?

As water experts we pick the very best most unique opportunities. Special situations. Catalysts. Names where the market is missing something. We analyze all nearly 1000 names in the global water space. We screen and narrow and focus all the way down to what we prefer to be a portfolio of the highest quality 1-2 dozen names. This provides plenty of diversification while allowing us to also materially outperform the comparable passive strategies with a focus and weighting on the best ideas.

What are you looking for in a company that you believe has the potential to reward both customers and investors?

We first evaluate the type of company, technology, breadth and potential of (global) application, management and financial track record, the company’s position to acquire or to be acquired, in cases such as water utilities their dividend history, the growth potential of the company compared to the 6-8% CAGR of the $600 billion global water sector, the company’s existing exposure to China, MENA, India which are the fastest growing markets for water technology, the company’s underlying contracts with municipalities and other public and/or private customers with long-term water supply and/or off-take agreements that usually range from 10-50 years and provide the underlying security and long-term capital appreciation of an investment. In essence: Does the case provide a sound, solid investment opportunity for a potential 10-30 years engagement for capital appreciation and mitigated risk while being an attractive liquid asset.

Will your investments be limited to public equities or will you put capital to work directly in water infrastructure assets or private equity?

Limited to public equities to ensure liquidity, risk mitigation and long-term capital appreciation. Water infrastructure assets and/or private equity although requiring the same flavor of capital “Patient Capital” do not provide for liquidity.

Both offer many of the same characteristics and benefits of investing in public water equities, but are limited in scale and application. Water infrastructure projects and private equity engagements in water assets are usually local and require an expert project financing approach. In addition water infrastructure projects most always involve dealing with the public sector. PPP (Public Private Partnerships) especially in the U.S. are still lagging behind other nations in terms of policy and capital. Much work needs to be done on this end for water infrastructure to swiftly become an appealing investment class thereby saving the foundation of our very own nation.

If not, why not and do you have any plans to do this in the future?

Once the U.S. has figured out the importance, urgency and need for simple, solid, attractive PPPs, the water infrastructure investment sector will be appealing and taking off. (Water) infrastructure investing can provide the same if not a better upside with less risk than what muni bonds back in the days when these instruments were a first class investment choice offered. Water infrastructure investing, if done properly provides not only long-term financial value, but most importantly social and environmental impact because water drives every single human, environmental and business process on earth. We have access to solid, private water infrastructure investment opportunities for $5M-$200M financing, but will not engage with Water Security Fund for such. Thomas Schumann Capital handles these opportunities on an advisory basis for investors interested in this space.

Water utilities have long been considered defensive, slow and steady investments within developed markets. So would you consider water to be a slow and steady income market or a growth market?

Slow and steady wins the race. Yes, water utilities in the U.S and Europe are a perfect example and an opportunity for the defensive investor seeking long-term capital appreciation and low risk in a steadily growing water market.

However, one has to take the possibility of a pending second wave of water industry consolidation in the U.S. into account in which water utilities will be playing their part. I would not consider water utilities a growth market as many require an overhaul of their operational and financial model. At the same time water utilities are a necessity to manage, distribute and supply water to communities. A defensive, slow and steady investment yielding 5%-11% per year should be appealing to any prudent investor given the fact that almost no “safe” asset class is providing any more yield and helicopter money and negative interest rates are the new normal.

I presume most of the growth to be found in this industry is within emerging markets. Could you give us one idea you’re looking at right now?

The key water markets are North America and Europe. Fast growth is coming from China, MENA and India which face the biggest water security challenges on the planet. Exponential population growth coupled with increasing droughts and floods, and climate change make for a compelling long-term, global growth story for water security. I am looking at China with 80% of its waters too toxic for fish to survive, its radical measures to implement water security, its awareness that economic survival and growth is depending on water security. Although Israel being the world’s leader in water technology, best water stewardship and management, followed by Australia, China does have the awareness, political and legal system, will and capital to make their nation water secure and become a world leader in water management.

How will the fund work to improve water security around the world?

By investing in solutions that provide water supply, water quality and water efficiency the fund invests in, advances and improves global water security. Water security requires awareness, policy, capital and action. My personal goal is to create awareness in the global investment community to redirect capital into “water” for purposes of social, environmental and financial impact. The more capital that can be directed towards water infrastructure, water technology and water conservation the more secure and sustainable our world will become. The public sector especially in the U.S. does not have the capital to advance water security, hence the capital needs to come from the private sector. We have a $1 Trillion financing gap for water infrastructure in the U.S. All it takes is to create attractive PPP models which provide financial incentives to private capital to channel billions of Wall and Main Street capital standing by to “jump into water” into the essential and rewarding asset class of “Water”.

Do you have any other plans in the pipeline for water investment products?

I prefer a single focus approach. I am all in on water! Water Security Fund is my life’s mission. I envision the fund once up and running and performing to scale globally and provide access for retail investors. 40Act and UCITS products are part of the strategy. Aside from Water Security Fund I serve investors seeking investments in early stage water technology and water infrastructure on an advisory basis. All with one single goal in mind: Advocating, advancing, promoting and investing in water security.

It’s clear the water market has huge potential but what sort of returns could investors expect?

I estimate the long-term financial return investor can expect between 10%-30%. This number does not include the social and environmental financial and non-financial return that is invaluable and cannot be measured in financial rates of return:

• Currently every 60 seconds a child dies of water-borne disease. How much do you value a human life? Saving peoples’ lives and improving peoples’ health is difficult to measure in dollars and cents.

• The World Health Organization estimates that the economic return of $1 invested in water and sanitation is $19. So there is plenty of “profit” and “return” to for everybody.

Do you believe water investments have the potential to outperform the S&P 500’s average return of 10% p.a. over the long-term?

Absolutely as they have done so to date. Especially in the persisting environment of helicopter money, negative interest rates, a potential U.S. and global recession, increasing social/environmental/financial uncertainty and volatility being the new normal, and a stock market awaiting a major correction. Keep in mind that the S&P500 does not drive human and business life and has never been a safe haven for the masses. Water does and is! Please see below charts:

Would you say this is a space for high-risk investors only?

No. Water is the space for traditional, prudent, defensive and smart investors who understand that wealth is build over time and requires patience, persistence and discipline. Water is also the space for the conscious, aware and socially and environmentally responsible investor who understands that water security creates the single largest impact for people, planet and profit. Hence water investments also serve the generation of investors which seeks to use capital and business as a force for good. A generation that is not driven by greed, fear and short-term profit-thinking for the the sake of depreciating people, planet and long-term profit potential. Water investments resonate with a generation of millennial investors that think and act generationally because they understand that a nation and society can only survive and evolve when it embraces sustainable and responsible management of its key resources of which water, air and food are the most important ones. Israel and Australia are leading the path and allocating substantial resources and capital to preserve and strengthen their water security. China and MENA are following close behind. The U.S. being the wealthiest nation on the planet has not yet realized it’s negligence and ignorance of water security yet and will pay dearly when not swiftly waking to water investing.

What is the fund’s compensation structure, will fees be aligned with investor returns?

Water Security Fund solely serves and is fully aligned with investors in addition to benefiting 7 billion stakeholders. Proposed fee structure is 1% management and 10% performance fee. The TER of the fund is extremely low. Fund management, governance, service providers and all terms and conditions first and foremost protect investors and their assets. Water security requires utmost integrity, stewardship and prudence. So do the assets that are stewarded by the fund and its management.

Michael Burry, the hedge fund manager who shot to fame after the release of the film The Big Short is now famously devoting al of his energy to water investing. Have you discussed your intentions with him and do you think he’s following a similar strategy?

I recently reached out to Dr. Burry and look forward to his response. To my knowledge, Dr. Burry focuses on water investment-related opportunities in food and agriculture which are a great and promising theme due to the Water/Food nexus.

I commend Dr. Burry on the transformation of his heroism and fame of “The Big Short” to serve 7 billion stakeholders by now pursuing “The Big Long”. He is and always will be a true inspiration of how something seemingly negative can be turned into something extremely positive that serves billions of people and ensures sustainable, ethical, long-term profit. As a society we collectively need to immediately move to “The Big Long”, a strategy our ancestors the Native Americans always embraced: “Seven generation stewardship is a concept that urges the current generation of humans to live and work for the benefit of the seventh generation into the future.[It originated with the Iroquois – Great Law of the Iroquois – which holds appropriate to think seven generations ahead (about 140 years into the future) and decide whether the decisions they make today would benefit their children seven generations into the future. It is frequently associated with the modern, popular concept of environmental stewardship or ‘sustainability’ but it is much broader in context”. In every deliberation, we must consider the impact on the seventh generation… even if it requires having skin as thick as the bark of a pine.” This is an often repeated saying, and most who use it claim that it comes from “The Constitution of the Iroquois Nations: The Great Binding Law.”

One final thought, when the pending financial crisis unfolds, level one water assets could present the safest haven with utmost long-term capital appreciation.