Nonetheless, the fund has continued to lag the broader market in the second quarter of 2026 - a consequence of the narrowing benchmark as much as a feature of the portfolio itself. Over the past 20 years, water and waste equities have delivered returns comparable to global equities with materially lower drawdowns, and the current portfolio trades at a meaningful discount to global equities on both an earnings and book value basis. Nothing fundamental explains the discount other than investor attention currently sits in another part of the market.
However, we believe the macro backdrop is quietly turning more supportive. US industrial production is rising; construction activity is recovering - a direct volume catalyst for waste businesses in particular. Recycling and commodity prices are improving. Order books are reflecting conditions that the prevailing market narrative has little interest in.
There is also a direct connection between the AI infrastructure build driving equity markets and the businesses inside this fund. Data centres are significant consumers of water, the majority of which is tied to power generation - each plant in the supply chain requires repeated recycling cycles to function. That demand is structural and long-duration, not simply a construction-phase event. The AI economy is building demand for businesses the market is currently content to ignore.
The AI trade is priced, in many cases, for sustained perfection - precisely the condition under which the risk-reward of adding further exposure deteriorates. As we’ve previously discussed, the forthcoming listings of SpaceX and OpenAI may yet prove to be events marking the cycle's peak - the liquidity required to absorb issuance of that scale has to come from somewhere, and the most likely source is the trade that is most crowded.
Water and waste businesses, by contrast, are not weak assets that happen to be cheap. They are strong assets - durable franchises, consistent cash generators, and have pricing power rooted in essential services - that are out of favour because attention has moved elsewhere. In comparison, the AI trade simultaneously requires the narrative to remain intact, sentiment to remain elevated, and earnings to continue surprising to the upside. The water and waste case requires only that the businesses continue doing what they have always done, and to date they are.
Buying quality businesses out of favour has historically been rewarding. The businesses inside this fund went about their work this week - collecting waste, treating water, and compounding - whilst markets celebrated a data cloud company adding US$20 billion to its market capitalisation in a single session.
