As the election approaches, fund managers have been weighing up the potential upsides and downsides depending on whether Joe Biden can unseat Donald Trump.
As the incumbent is a vocal champion of coal and steel, “a red wave scenario would have a negative impact on sustainable infrastructure spending by the US government”, Jade Huang, portfolio manager at Calvert Research and Management, tells Expert Investor.
But water infrastructure could be an exception.
As part of his campaign pledges, when it comes to infrastructure, Biden has promised $2trn to restore highways, roads and bridges, increase adoption of electric vehicles and trains, develop 5G networks and renewable energy, including water systems.
Trump has proposed a $1trn (€854bn) spending package; targeting roads, bridges, water systems, 5G networks and rural broadband.
This suggests that water infrastructure companies may not suffer even if Trump is re-elected.
Local structures and upgrading
While a significant recession could risk funding commitments, Huang believes that water infrastructure investments may continue regardless of a blue or red wave scenario because of US local structures.
“Much investment in water infrastructure happens at the municipal and state level which may continue based on local and regional needs that fall outside federal spending,” she explains.
Andreas Fruschki, head of thematic investing and senior portfolio manager at Allianz Global Investors, believes that water needs are driving the opportunity, as water is essential for cities and companies and not replaceable.
“As such, political changes on federal level will not change the fact that crumbling water networks will need more investments in the future.
“The need and urgency to make available funds to replace the ageing US water network is not contested by either side of the aisle and a broken water main needs fixing, regardless of politics,” he says.
Calvert water fund
The Calvert Global Water Fund is a passive vehicle launched in September 2008 and tracks the Calvert Global Water Research Index.
Huang explains that Calvert selects companies taking the lead in the protection and preservation of water resources, which address issues such as scarcity, pollution, and quality.
To be eligible for the universe, companies must be significantly involved in water-related business activities, which the firm defines as water utilities, water infrastructure providers, water technology providers and water solution providers (water use leaders and innovators).
Selected businesses also need to be consistent with the Calvert Principles for Responsible Investment, the firm’s ESG framework.
The fund, which has $387.4m of assets under management, underperformed the MSCI ACWI year-to-date (as of end of June), returning −10.42% versus −6.25%.
In the last three years, it returned 2.95%.
Huang said that while water technology companies have benefited from growing demand globally, the performance of water infrastructure firms was more mixed over the past three to five years, depending on their end-markets.
But, as the fund is global and diversified in terms of regions and sectors, it tends to reduce the impacts of either a blue wave or red wave scenario, she adds.
“For example, water infrastructure – the sector most impacted by the US election – is limited to 25% of the fund, of which only 11% of the fund is comprised of US–based companies.
“Because the fund invests along the water value chain, the end markets are also diverse, which further limits the impact of either scenario,” she explains.
Allianz fund
Fruschki tells Expert Investor that US water infrastructure is in poor condition due to age and that a substantial increase in funding is needed to address this problem.
According to an Allianz GI document, American Water Works plans to invest $8.6bn between 2019-2023.
Renovation needs and ever-increasing drinking water quality standards make it “a highly predictable and longer-lasting growth case well beyond this and next decade”, he notes.
Adding to this, he says that “demand for fresh water is growing steadily due to higher living standards, water-intensive industrial production or farmland increasingly in need of irrigation”.
The Allianz Global Water fund, a global equity fund with €40.15m assets under management, was launched in August 2018.
From a universe of over 150 stocks, it screens solutions across water supply, efficiency and quality and aligns it to the UN Sustainable Development Goals.
This results in the portfolio holding 30-40 high conviction and attractively valued stocks.
“Our belief is that water scarcity is a problem [that will only get] worse unless investments are made in solutions; such as water leakage detection, water re-use or smart water supply management to ensure access to plentiful and affordable clean drinking water in future,” Fruschki says.
The Allianz Global Water fund underperformed the MSCI ACWI, returning 1.2% year-to-date versus 4.75%.
In the last three years, it returned 22.98%. US holdings make up 57.59% of the fund, followed by UK holdings with 13.77%.
Fruschki believes that “there is bipartisan support for a US infrastructure bill in general”, independent of who will win the US presidential election.
