For the past three years, the World Economic Form 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.
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