Upload
bill-brennan
View
1.088
Download
0
Tags:
Embed Size (px)
Citation preview
FOR FINANCIAL PROFESSIONAL USE ONLY
Brennan Investment Partners LLC-Investing in Global Water Stocks
William S. Brennan, Portfolio ManagerOctober 2009
The Case for Water Investing
2
You should consider the investment objectives, risks, charges and expenses of the fund carefully before investing. Visit our website at www.brennaninvestment.com or call 610-727-6828.
Past performance does not guarantee future results. In addition, investing in foreign securities involves more risk than just U.S. investments, including the risk of currency fluctuations, political andeconomic instability and differences in financial reporting standards. There may also be heightened risks investing in noninvestment grade debt securities and the use of options, there are alsorisks associated with investing in small and medium sized companies. Non-investment grade debt securities, i.e., junk bonds, are subject to greater credit risk, price volatility and risk of loss thaninvestment grade securities. Options contain special risks including the imperfect correlation between the value of the option and the value of the underlying asset. An investor cannot invest directlyin an index. This material has been prepared for a private presentation. It is for informational purposes only, is not for distribution to investors and does not constitute investment advice or publicor private offering or recommendation of any kind. This document and its content are the property of Brennan Investment Partners LLC (BIP) and cannot be reproduced or transmitted to anyperson in any form or by any means in whole or part without prior written consent from BIP. Portfolios are subject to stock market risks and significant fluctuations in value. The Investment Advisermay not be able to sell portfolio securities at an optimal time or price. Concentrated portfolios that invest a substantial portion of their assets in a particular industry carry a risk that a group ofindustry-related stocks will decline in price due to industry specific developments. Companies in the same or similar industries may share common characteristics and are more likely to reactcomparably to industry specific market or economic developments. The Portfolio may invest in the equity securities of small and medium size companies. Small and medium-size companies oftenhave narrower markets and more limited managerial and financial resources than do larger, more established companies. As a result, their performance can be more volatile and they face agreater risk of business failure, which could increase the volatility of the Portfolio’s assets. The Portfolio may invest in foreign securities, which can carry higher returns but involve more risks thanthose associated with U.S. investments. Additional risks associated with investment in foreign securities include currency fluctuations, political and economic instability, differences in financialreporting standards and less stringent regulation of securities markets. In a non-diversified Portfolio, more of the Portfolio’s assets may be concentrated in the common stock of any single issuer,which may make the value of the Portfolio’s shares and therefore, the Portfolio’s shares, more susceptible to certain risks than shares of a diversified mutual fund.
Disclaimer
•The Case For Water
NO ECONOMIC SUBSTITUTE
LOW CORRELATION TO THE MARKET
SCARCEST COMMODITY – REMAINS ABSURDLY UNDERVALUED
SUPPLY/DEMAND –NOT AVAILABLE WHERE IT IS NEEDED MOST
MOST CRITICAL INDUSTRIAL INPUT TO THE WORLD’S ECONOMY
FUNDAMENTAL DISCONNECT BETWEEN WATER PRICES AND THE TRUE COST OF WATER
•Introduction to Brennan Investment Partners
Value-based investment firm targeting clients with two portfolios in the water and water related industries:
Global Water Solutions composite uses a multi-cap value investment strategy to invest exclusively in
companies offering water and water-based environmental and ―green‖ solutions.
Global Water Relative Yield Portfolio; a concentrated global portfolio with an emphasis on yield.
Founded in 2008, our long bias investment approach utilizes both qualitative and quantitative methods to
manage the portfolios.
Investment team has an average of 18+ years of experience in the water field.
Team culture and investment philosophy provide research synergies and a collegial environment, seeking to
generate returns and manage risk.
Aims for annualized absolute return that outpaces the market over full market cycles.
Client base comprised of high net worth individuals, family offices and institutions.
Headquartered in Pennsylvania.
3
Industry Overview
• $700 Billion industry comprised of 550+ publicly traded
companies
• Global industry growth rate: 6-8% Developed countries / 10-
15% emerging countries
• Stimulus spending in U.S., EU and China is accelerating
present growth rates.
The Case for Investment
• Water is a unique commodity with no substitute or alternative
and high future demand. Since 1989, water prices have risen
faster than oil with minimal volatility
• Global water infrastructure suffers from under-investment—
although global spending in the space has tripled since 2004.
US and China account for 50% of global water spending.
• Asia and emerging markets infrastructure build out/ U.S. water
infrastructure replacement representative of global water
spending activities. 4
Investing in Global Water Infrastructure
Global Water Infrastructure Snapshot
Industry Size ($Billion) $600-700
Publicly Traded Water
Companies
550+
Aggregate Market Capitalization $2 Trillion
Developed Country Growth
Rates
6 – 10%
Emerging Market Growth Rates 15%
Chinese Growth Rate 15 – 20%
Water Oil
Annual Price
Increase 1989 –
2008
6.3% 6.2%
Annual Price
Volatility
4.2% 42.9%
Investment Themes
Water Subsectors within the Portfolio
• Industrials – Approximately 52.1%
• Membranes
• Filters
• Desalination
• Chemicals
• Pumps/motors/valves
• Emerging technologies
• Water Utilities-Approximately 42.5%
• Water Dependent Themes – Approximately 5.4%
• Agriculture, Hydroelectric
5
Water Overview - Market Size & Profile of Companies
Subsector Revenues ($B)
US Global
Utilities 27 325
Treatment 24 125
Industrial treatment 22 70
Infrastructure 12 30
Valves 8 35
Filtration 12 25
Pumps 5 25
Other equipment 24 58
Total 134 693
• Source: Brennan Investment Partners LLC
6
Sector/Index1989 –
1993^
1993 –
1998
1998 –
2003
2003 –
2008
1989 –
2008^
Water Utility Stocks 14.78% 18.51% 6.36% 6.36% 796.91%
Water Industrial
Stocks18.02% 16.09% 9.38% 7.25% 751.84%
S&P 500 Energy
Index6.85% 16.60% 6.56% 13.43% 625.82%
S&P 500 Health
Care Index8.53% 35.04% .14% -.73% 505.55%
DJIA 15.44% 22.28% 4.55% -1.12% 401.17%
S&P 500 14.54% 24.05% -057% -2.19% 282.92%
S&P 500 Financial
Index12.64% 27.09% 5.91% -12.48% 265.38%
NASDAQ Composite 15.28% 23.47% -1.45% -3.95% 272.45%
The Investment Thesis For Water-Utilities and Industrials
Data Source: Bloomberg. All returns are with dividends reinvested
*Equally weighted list of all publicly traded U.S. water utility stocks that existed throughout 1989 – 2008
^4 year and 19 year periods due to limitations in Bloomberg pricing history
Returns of U.S. Water Utility and Water Industrial Stocks vs. Major
Indices
Water Utilities and Water Industrials have outperformed in each period
with no negative returns
Water Utilities and Industrials Overview
• Low correlation investment that has
outperformed the broader indices
• US water rates are projected to increase 2-5x
over the next five years
• Water Utilities are the hub of most water
infrastructure spending
• Increased utility spending equals increased
revenues for water industrials
• As water utilities increase spending, water rates
rise
• Increased capital spending justifies higher rates
and higher returns for the utilities
Where We Invest
Regions where we invest
• US
• Asia
• Canada
• South America
• European Union
• Middle East
7
Country specific
• U.K.
• Switzerland
• France
• Italy
• Greece
• Germany
• China
• Hong Kong
• Japan
• Philippines
• Singapore
• Thailand
• Brazil
• Water is Life
•50% of hospital beds globally occupied by
people suffering from water borne illness
14% of U.S. healthcare costs are related to
water borne illness (John Hopkins)
Region CountryWater
subsector & opportunity
8
In 2009, the American Society of Civil Engineers rated US water infrastructure as D-…At
the current rate of replacement, it would take 900 years to upgrade the US system.
Los Angeles 9/09 Bethesda, MD 12/08
Harimann, TN 12/08 New York City, 7/07
The Investment Thesis For Water – U.S. Drivers
Underinvestment in Infrastructure
• The U.S. is $600 Billion behind in spending on
drinking and waste water systems - this expected to
pass $1trillion by 2020
• Much infrastructure is over 100 years old and in
disrepair - 30% of water wasted through leakage
Population Growth & Increased Usage
• U.S. water demand has tripled in 30 years while the
population has only grown 50%
• Inelastic Demand: Usage continues to increase as
reuse and reclamation technology has limited
availability
Regulation
• EPA will become more active in water regulations in
next 12 months since there have been no significant
changes to the Federal water regulations in over 20
years 9
OVERVIEW OF U.S. WATER ASSETS
•Drinking Water: 53,000 water facilities for public drinking water.
Received a D- grade from the American Society of Civil
Engineers in 2009
•Opportunity: Publicly held operators will acquire smaller
municipal utilities
•Waste Water: 16,000 treatment plants. Received a D- grade
from the American Society of Civil Engineers in 2009. Sewer
overflows discharge 850 billion gallons of contaminated
water per year
•Opportunity: Water utilities will “Upgrade & Build” - The
estimates (in 2000 dollars) of U.S. clean water needs for building
new and updating existing wastewater treatment plants, sewer
maintenance/construction, and combined sewer overflow
corrections were $57.2, $67.9, and $50.6 billion, respectively
•Pipes: 2 million miles of drinking and waste water pipes. >60%
are beyond their intended lifespan at the end of 2010. U.S. pipes
experience 30% leakage rates on average—wasting 7 billion
gallons of clean drinking water each day.
•Opportunity: Replacement is inevitable - Next generation
replacement pipe will have leak monitoring/energy recovery built in
place
10
The Investment Thesis For Water - US Drivers
•Forecast of Capital Expenditure in US Water and Wastewater Infrastructure 2007 - 2016
• Source: Global Water Intelligence
The Investment Thesis For Water - US Drivers
Economic drivers
• Growth in demand, caused by massive industrial
expansion and population growth
• Population growth is occurring in the nation’s most
water stressed areas
• Water quality continues to deteriorate at an alarming
rate
• Lack of water availability could produce slower
economic development for certain water constrained
markets such as California and the U.S. Southwest
Social Awareness
• Increased public awareness of water related
problems – frequency of media coverage has
dramatically increased in last three years alone
• The price of water does not reflect its true value or
intrinsic worth to residential, commercial and
industrial users - resource is significantly sub-valued
.11
•Demand for Water in the US is Growing the Fastest
Where it is Least Available
The Global Investment Thesis For Water
12
•44% (2.8 billion) of the worlds population lives in areas of severe water stress
Emerging Markets
• Population rates, resources, lack of availability,
agriculture and wastewater are key industry drivers
• Asia accounts for 60% of world’s population and
36% of world’s resources – highest water stress
area
• 70% of all water used on a daily basis is
agriculture related. Food price volatility will be a
continued to escalate.
• As emerging markets develop, dietary habits
change, food consumption increases …water
usage increases accordingly.
• Food demand is projected to grown 70-90% by
2050
• Water is a major economic constraint for many
parts of the world, namely China
13
ProductWater Content
(gallons)
1 glass of beer 20
1 glass of milk 53
1 cup of coffee 37
1 slice of bread 11
1 slice of bread w/cheese 24
1 apple 18
1 cotton T-shirt 528
1 glass of wine 32
1 glass of apple juice 50
1 glass of orange juice 45
1 egg 36
1 hamburger 634
1 orange 13
1 pair of leather shoes 2114
•Global average of virtual water content of
selected products (per unit of product)
The Global Investment Thesis For Water
14
• 12% Population Growth Rate
• Asia and Latin America match world’s population growth rate through 2015.
• India and China account for 40% of world’s population.
• Less than 20% of Latin America’s and Asia’s populations is served by private sector water companies.
• 32% of Global Water Consumption
• India’s hydroelectric power generation contribution is targeted to increase from 25% in 2008 to 40% of total energy output.
• China’s discharge of industrial and non-industrial wastewater increased 30% from 1999 – 2005.
• China’s municipal wastewater treatment rate is targeted to increase from 52% in 2005 to 70% in 2010.
Investment Themes– BRIC Drivers
Population growth rates and sizes, power generation, and wastewater treatment drive demand.
Source: “Water Worries” by Citi (2008)
“Water, Water Everywhere, but Not a Drop to Drink” by RBC (2008)
Snapshot - China Water Sector Fundamentals
China Overview
• China plans to invest US $128 billion in water related projects
through 2010 – Water trails only the military complex in
capital expenditure in China
• 60% of China’s cities suffer water shortages
• 50% of China’s cities lack wastewater treatment centers.
The Yangtze River absorbs nearly half of the country’s
wastewater (almost entirely untreated)
• China is acquiring agriculture land in Southern Africa as
government policy will allocate less water to agriculture and
more to industrial and energy requirements
• Investment will continue to increase as policy makers
recognize that inadequate water infrastructure will curb
economic growth
15
Industry Trends
• Desalination will emerge as a viable option
for water stressed areas worldwide. America
is the second largest market after Saudi
Arabia. Solution Provider: Veolia, Doosan
Heavy, IDE, Suez, Acciona
• More small communities with restricted
access to capital will ―Outsource‖ their utility
and wastewater operations. Only 17% in
U.S. and 45% in EU are privately owned.
Solution Provider: United Utilities, Severn
Trent ,Veolia, Suez Environmental.
• Wastewater reuse is becoming more
prevalent as treatment allows it to emerge as
drinking water quality, creating real value to
the community. Solution Provider: Veolia,
Suez Environmental , CK Infrastructure,
American Water, Aqua America, Severn
Trent16
•Expenditure forecast on desalination and water reuse 2007-2016
(U.S.)
Industry Trends
• Water distribution pipes that are over
100 years old are experiencing alarming
failures and leaks. With leakage rates
between 20-35% in the U.S. and much
higher in Europe, ―the perfect storm‖ is
approaching with 70% of all water pipes
going beyond their useful life by 2012.
New pipes will have leak monitoring and
energy recovery built in beginning in
2010. Solution Provider: Ameron,
Northwest Pipe, Sinopipe, Corinth Pipe
• Water Meters are presently used in only
25% of U.S. homes. They are the primary
means to regulate water usage and
manage consumption behavior. With next
generation meters employing
nanotechnology and composite materials,
this sector is embracing and deploying
new technology. .Solution Provider:
Badger Meter, Itron, Esco, Roper 17
Water equipment market forecast 2007-2016
Industry Trends
• Water technologies such membrane
technologies, UV and ozone are projected to
experience strong growth rates though
2016. The water business has been slow to
adopt technologies and private equity has
not significantly participated relative to the
cleantech sector over last three years. This
trend is changing as nanotechnology and
materials lead the way. Solution Provider:
AECOM, Flowserve, Tetra Tech, ITT
• For much of the world, water has been
underpriced, leading to overuse and
waste. This will not be the case in the
future. Massive investments will be
deployed to ensure that nations can
sustain growth without water
bankruptcy.
18
•Expenditure forecast for water technology 2007-2016 (U.S.)
Portfolio Offerings & Construction
Investor Communication
Investment Professionals
Addendum
19
•The Offerings
Our Global Water Solutions composite uses a multi-cap value investment strategy to invest exclusively in companies offering
water and water-based environmental and ―green‖ solutions. The composite portfolio addresses solutions such as
desalination, membrane technology, wastewater treatment, water utilities, water management, and other market segments
such as timber, hydroelectric, security and agriculture which directly tackle some of societies’ biggest water related challenges.
The composite may invest a portion of assets in international markets and typically focuses on small and mid-sized companies
between $250M and $25B+ in market capitalization. Its benchmark is the S&P 500.
•Approximately 30 positions
•· 7% position limit (4% at purchase)
•· 1.25% minimum position
•· Turnover 70% - 100%
•· Sector limits - water infrastructure / water-related activity (minimum 30% revenue generated from water)
Our Global Water Relative Yield Strategy composite offers a concentrated portfolio of primarily global water utilities. The
composite consists typically of 15 companies that provide a total return primarily through investment in equity and equity
related securities of water utility companies which the manager believes offer attractive yields and sustainable dividend
payments.
•Approximately 15-20 positions
•· 8% position limit (5% at purchase)
•· 2.5% minimum position
•· Turnover 40% - 70%
•· Sector limits - mainly global water utilities and pipe manufacturers20
•# of Companies
•1
•2
•3
•4
Eliminate deep cyclical businesses
•Approximately 9 sub-sectors
•Require 12% earnings growth over
•next 3–5 years per annum
•Define businesses in universe
•Perform fundamental analysis to
•confirm quality standards
•Target Portfolio (30 companies)
•Minimum market capitalization of
•$150 million
500
280
130
80
50
30
•Idea Generation•Idea Generation – Water Solutions Universe
21
•Investment Process
•Financial Model Strength•Growing cash flow/internal financing
•High / rising profit margins•Low debt
•Market Leading Position•Competitive Advantage
•Consistent Growth•Unit volume increase
•Fee based business model•Recurring revenue
•Management Style•Cash flow management
•Process•Responsive
•13,000
•5,900
•2,100
•316
•120
•30
•1
•2
•3
•4
500
280
130
80
50
30
•# of Companies
•Investment Process-Water Solutions Universe
22
•# of Companies
•1
•2
•3
•4
•Evaluate global water utilities and pipe
• manufactures
•Require 12% earnings growth over
•next 3–5 years per annum
•Identify highest yield businesses in
universe
•Perform fundamental analysis to
•confirm quality standards
•Target Portfolio (15-20 companies)
•Minimum market capitalization of
•$150 million
•110
•50
•45
•30
•30
•15
•Idea Generation•Idea Generation – Global Water Relative Yield
23
Stock down relative to
• industry peers
2 consecutive quarters of
• earnings disappointment
Major change in
• Company or Industry
• Fundamentals
Stock grossly overvalued
•Upgrade
•or
•Buy•or
•Sell
Evaluate Re-assess
•If one or more of the following occurs, •then…
Trade Discipline
24
•Investor Communication & Frequency
Sales Channels
Flash Commentaries Monthly (5th Business Day)
Final Commentaries Monthly (20th Calendar Day)
Detailed Portfolio Reports Quarterly
Conference Calls with Prospects Monthly or Quarterly
Small Group Training Sessions As Needed
One-on-One Meetings As Needed
Attending Events (e.g., Investment Summits, etc.) As Needed
Investors
Commentaries Monthly
Client-Specific Portfolio Reports Monthly
Performance Review Meetings Quarterly or Semi-Annually
Telephone Calls As Needed
25
26
William S. Brennan serves as the Portfolio Manager of The Kinetics Water Infrastructure Fund. He is the founder, President, andPortfolio Manager of Brennan Investment partners LLC, a registered investment advisor that focuses on water, infrastructure andsustainability He previously was the founder and President of Aqua Terra Asset Management, a subsidiary of Boenning & Scattergood.Mr. Brennan joined Boenning & Scattergood in 2004 as Director of Equities and served as the President & Managing Director,overseeing Aqua Terra’s investments. Mr. Brennan was responsible for creating the firm’s water investment management presence andalso served as the Portfolio Manager of the Praetor Global Water Equities Fund in Luxemburg through August 2008. He was alsoresponsible for the portfolio selection for the Claymore Global and Domestic Water UITs, the first water investment products launched inthe US.
Mr. Brennan served as a Portfolio Advisor / Analyst to Summit Water Partner, a San Diego based global water hedge fund frominception through February 2006 as well as the co- Portfolio Manager of the Praetor Water Fund with John Dickerson, the hedge fundportfolio manager until September 1, 2005.
Mr. Brennan began his investment career with Pacific Growth Equities in San Francisco, where he ran the Environmental Services,Aviation Security and Special Situation groups for six years.
Mr. Brennan was a director with Law Environmental / Law International, an international engineering and design company based inAtlanta.
Mr. Brennan is a graduate of Lehigh University with a BS in Mechanical Engineering / Biology, where he was a distinguished graduate ofthe Air Force ROTC program and a starter on both the varsity football and baseball teams, an MS in Biomedical Engineering fromColorado State University, and an MBA from Villanova University, where he is and has been an adjunct professor in the graduate MBAprogram for the past ten years.
Biography
William S. Brennan, Portfolio Manager
27
Contacts
William S. Brennan
President/Portfolio Manager
Office: (610) 727-6828
Facsimile: (610) 727-6905
Mobile: (610) 304-2729
E-mail: [email protected]
Daniel Aboyan
Managing Director, Corporate Development/Marketing
Office: (610) 727-6834
Facsimile: (610) 727-6905
Mobile: (610) 212-1550
E-mail: [email protected]
Geoffrey Morrissett
Director/Principal
Office: (610) 727-6834
Mobile: (415) 652-6214
Facsimile: (610) 727-6905
E-mail: [email protected]
Brennan Investment Contacts