'Invest in the water companies that keep the global economy going'

Water and waste management are fundamental to the smooth functioning of any economy, yet these sectors are often overlooked in investment portfolios. The water value chain includes companies involved in pumps and valves; water filtration and purification; water-related infrastructure and networks; metering and billing; and wastewater treatment.

Waste solution providers include companies involved in waste collection, transporting, sorting, and recycling; hazardous-waste management; pollution prevention and control; environment planning; and related consulting and engineering services.

The Regnan Sustainable Water and Waste Fund combines the best opportunities from the water and waste-value chains. All stocks in this under-researched area of the market undergo detailed scrutiny of their fundamentals and sustainability credentials.

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The stocks in our theme have unique characteristics and extremely low overlap with global equity portfolios, providing much-needed diversification away from widely held sectors such as technology and energy. In an environment of high inflation, uncertainty about tariffs, and macroeconomic volatility, these sectors present especially compelling opportunities for investors seeking resilience and long-term growth.

Recurring revenue raises resilience

Republic Services (NYSE: RSG) is a leading provider of non-hazardous solid-waste management and recycling services in the US. The company’s recurring business model provides stable revenue streams, fostering resilience to economic downturns. RSG offers stable pricing, driving mid-single-digit organic growth along with contributions from acquisitions.

Investments in advanced recycling and landfill gas-to-energy projects reinforce its leadership in sustainability and technology. With strong free cash flow, disciplined capital allocation and a prudent dividend policy, RSG balances shareholders’ returns with reinvestment in innovation and operational efficiency. The stock is enjoying a rerating.

Watts Water Technologies (NYSE: WTS) is a global provider of plumbing, heating, and water-quality products and services, serving a large and diverse market with an estimated value of around $20 billion. The company is well placed to capitalise on secular trends in water conservation, energy efficiency and sustainability – critical issues for residential, commercial, and industrial customers worldwide. The business includes a division dealing with repairs and replacements of parts, and has historically generated stable free cash flows.

Watts is rapidly expanding its portfolio of “smart and connected products”: devices capable of being connected through the Internet of Things. These products now comprise 25% of sales and command premium pricing thanks to their ability to reduce consumption of resources and improve operational efficiency. We also expect the firm to enjoy strong pricing power, mitigating any immediate impact from tariffs.

Going for growth in Japan

A lesser-known waste management company we like is Daiei Kankyo (Tokyo: 9336), a leading Japanese waste management and recycling company. It operates in a highly fragmented Japanese waste-management market, with the top four companies accounting for less than 4% of the market. The company is targeting at least ¥10 billion in acquisitions over three years.

Daiei Kankyo recently released its medium-term strategy, and we are encouraged by its near-term plan of maintaining a 35% Ebitda margin while it continues to invest in growth areas, including public-private partnerships. Shareholders’ returns also remain a priority, with a consolidated dividend payout ratio above 33%.

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