Can you give a brief overview of your strategy in terms of what you are trying to achieve for investors, your investment process and the make-up of the investment team?
The Regnan Sustainable Water and Waste Fund aims to generate capital growth over rolling 5-year periods and to pursue a sustainable objective by investing in companies which provide solutions to global water and/or waste related challenges. We invest across the water and waste value chains, including in companies developing new technologies to meet the ever-growing demand for solutions to these challenges.
We believe that there is no economy without water and no sustainable economy without waste management. Equities in this area offer highly visible and stable earnings and are backed by a positive regulatory and corporate environment.
We have a proven, robust and replicable investment process. We aim to build a high conviction portfolio with unique characteristics and extremely low overlap with global equity portfolios - providing much needed diversification away from widely held sectors such as technology, communication services, healthcare, financials and energy, whilst also offering diversification within the sustainable space (which is predominantly focused on decarbonisation). As part of our thorough fundamental analysis, companies are assessed using quantitative and qualitative factors and in doing so, we use data from proprietary models, local intelligence, undertake company visits and also use analysis from Regnan's ESG specialists.
The strategy is managed by a two-person team: Bertrand Lecourt, Senior Fund Manager and Saurabh Sharma, Fund Manager. The team previously managed the Fidelity Sustainable Water and Waste Fund, which was launched in November 2018. Both Bertrand and Saurabh bring their own unique backgrounds and skillsets. Additionally, the team are supported by a Portfolio Specialist and the Regnan Insight and Advisory Centre, which has a long history of providing research on ESG issues, and in working with investors to implement and evolve their responsible investment and stewardship practices.
How are you positioning your portfolio for 2022 and what will be key issues for investors?
After a strong 2021, equity markets had a rough start to the year. As we noted in our beginning-of-the-year outlook, inflation and central bank tightening are the key themes for 2022. This narrative led to heightened volatility in Q1 2022. Concerns over economic growth and inflation were exacerbated by tensions in Eastern Europe. In our view, moderate interest rate adjustments mixed with relatively high inflation will be the theme for the rest of 2022. This macro environment bodes well for water and waste companies, and we continue to maintain a balanced portfolio.
We expect demand for water equipment companies to stay at elevated levels and companies that execute well on pricing will come out as winners. Integrated solid waste companies also started 2022 with good momentum. Some of the indexed sales repricing will continue to happen through the first half of the year and volumes should also get unlocked as economic activity continues to accelerate. We continue to be mindful of elevated valuations in growth stocks which may be over-pricing recovery benefits. We continue to remain focused on our core names which offer high cash visibility and pricing power. We also see potential upside in some emerging market names which have lagged their developed market peers in recent quarters. Meanwhile, Europe remains relatively less attractive, and we continue to be selective in this market.
Can you identify a couple of key investment opportunities for your fund you are playing at the moment in the portfolio? This could be at a stock, sector or thematic level.
Our strategy is unique in combining both water and waste value chains. Waste management is one of the key issues facing towns, cities and governments across the world. The world generates around two billion tonnes of municipal solid waste annually. Yet, a good portion of this waste is not managed in an environmentally safe manner. We believe the waste market is set for an overhaul of business models as regulation and environmental awareness catalyse change. Once governments commit to addressing the issue of waste, they need to develop a suitable waste strategy. This will present numerous opportunities for companies operating in the sector.
Waste companies have exhibited solid fundamentals with steady revenue growth, strong pricing power, robust operating income and expanding net income margins. These characteristics, combined with structural thematic supports, have resulted in the strong share price performance for the theme. We expect these trends to continue as economies start to reopen and recover from the Covid-19 crisis. The Regnan Sustainable Thematic Investment team has a strong track record of analysing these stocks and pioneered an investment strategy focused on waste. We also have the in-house expertise of performing detailed sustainability analysis on these companies.
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