Season 2: Episode 05 - Investing in Water with Rene Reyna of Invesco

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Linda Rogers: [00:00:00] My name is Linda Rogers and this is Investing Forward.

Linda Rogers: [00:00:15] Let's talk about water. I just attended Sustainability Week here in D.C. that was hosted by The Economist. It was a full day with a lot of great speakers, including a White House Economist talking about the Inflation Reduction Act, Chief Sustainability Officers from quite a few Fortune 500 companies talking about their initiatives, and BlackRock giving a landscape analysis on global sustainable investing. There was even a speaker from the U.S. Navy talking about a Marine Corps base in Albany that has achieved "Net Zero" energy, a first for the DoD. In all of these conversations, water was discussed a lot. In the same breath that companies stated their "Net Zero" goals, they were stating their water-neutral goals. The focus with "Net Zero" has historically been around carbon, but water is now part of the conversation, as it should be. The amount of water on earth is finite, but as the population increases, the amount of freshwater per person decreases. Supply is being negatively affected by climate change, pollution, inefficiencies due to aging infrastructure, and mismanagement. Therefore, this episode I want to focus on the compelling story of investing in water-focused companies. These are companies that are actively improving water security in a variety of areas from technology, infrastructure, wastewater, and desalination. I asked Rene Reyna to join me from Invesco. He's the Head of Thematic and Specialty Product Strategy at Invesco US. They are the largest player in the ETF water space and he will share with us some details around PHO, the Invesco Water Resources ETF.

Linda Rogers: [00:02:14] Nice to meet you. Thank you for joining us. Go ahead and tell us about yourself.

Rene Reyna of Invesco

Rene Reyna: [00:02:19] So pleasure to be on your podcast Linda. So my name is Rene Reyna. I am the Head of Product Strategy for Invesco's Thematic ETF Lineup. So I'm currently responsible for supporting approximately 60 ETFs. This group of ETFs I would classify as providing exposure to both sort of these nextgen themes. I think sustainability is one of those themes, and then more of your traditional industry sort of thematic categories. My team and I, you know, really focus on helping our clients understand our products, how they work, how they fit in the portfolio, how they perform. And then we also make strategic decisions about our product line. I think similar to you, I'm also a Certified Financial PlannerTM. I have that designation and in my role, it just really helps me better understand what challenges our clients face, your clients face and so, yeah, I'm really thankful I pursued that designation. And, you know, I've been in the industry for going on 18 years now. I've been at Invesco for 13. And on the personal side, I'm a family man, so I have my wife, Stacey, who lives with me here in Munster, Indiana. And then I have three children. Tyler, he's 20. He's just finished his sophomore year in college. My son Ethan, who's 14, and then my daughter, the princess, Harper, who's 11.

Linda Rogers: [00:03:43] I love that. And since I didn't realize you had the CFP(R) designation, I have to ask, did you take the one day test that they have now, or did you have like the full two days like I did? Do you remember?

Rene Reyna: [00:03:54] I do. I was able to take the one day test.

Linda Rogers: [00:03:58] I'm so jealous.

Rene Reyna: [00:03:59] Yes.

Linda Rogers: [00:03:59] Okay. You're lucky. I'm sure it was just as hard.

Rene Reyna: [00:04:02] It was.

Linda Rogers: [00:04:04] Awesome. Okay. Well, tell us a little bit more about Invesco.

Rene Reyna: [00:04:07] Sure. So Invesco is a global asset manager. We're tasked with the responsibility and privilege of managing over $1.4 trillion in assets across retail clients, institutional clients, international clients. We do have investment capabilities through a diverse set of investment vehicles, so to name a few, would be ETFs or exchange-traded funds. We have mutual funds, UITs, SMAs, private investment funds. So to just name a few. We have about see last looked about 8,000 employees in numerous countries across the globe and we are a publicly traded company, so we trade under the ticker IVZ.

Linda Rogers: [00:04:49] Wonderful. So. Wow. You've been there for 13 years. Tell me how you ended up working there.

Rene Reyna: [00:04:56] So we talked about the CFP(R). So interesting enough, back when I did my undergrad at Purdue University, they actually had a CFP program, so my degree was in Financial Planning and Counseling, and I was able to do the coursework there for the CFP(R), all the foundational work for the test. From college, I started working at a small financial planning firm, so I was a paraplanner. I then went to the bank side and was working for JP Morgan, and in both of those roles I had the opportunity to meet a lot of product partners, wholesalers, and they really shared with me how the asset management side of the industry worked. And, you know, I just became fascinated with that side of the business. And after about, you know, five years on the client-facing side, I started to pursue asset management. And I ended up at Van Kampen, which at the time was owned by Morgan Stanley. You know, this was around the global financial crisis. Morgan Stanley sold the Van Kampen business to Invesco, and that's how I ended up there. So I started my career on our internal sales desk supporting our products, actually covered Southern California, then moved into some product roles. I led a product strategy and development team for our investment trust business. And then fast forward to today. I'm now in my role supporting our ETF. So maybe a longer answer, but you know, that's how I ended up at Invesco.

Linda Rogers: [00:06:32] So you came through a merger essentially, right?

Rene Reyna: [00:06:37] An acquisition.

Linda Rogers: [00:06:38] Yep. Yeah, an acquisition. Great. Okay. And what would you say is the case for investing in water-focused companies?

Rene Reyna: [00:06:48] So I think you first start with the basics. You know, water, as we all know, state the obvious here, but it's a basic human need. It's essential to the production, delivery of nearly all goods and services. We think, you know, on the planet, you know, 3% of Earth's water is freshwater. Two-thirds of that is either hard to access or unavailable. We have some challenges. You know, there's greater demand due to population growth and there's this ongoing impact of an accelerating global warming. So, you know, water shortages as a result are intensifying. So think droughts, for example, which I think is, you know, we all sort of in the US see as weather patterns change. So those impacts and so if we do not improve efficient water management, we will eventually see greater effects to crops, food supply. You know, I was just reading an article this weekend in, you know, Barron's, a industry publication, if you are familiar with extra virgin olive oil, which I think a lot of us use for cooking, you know, 40% of that supply is in Spain. And so Spain has gone through multiple droughts. And because of this, they're, you know, seeing lower yields. And so now you're seeing, you know, on one hand you got kind of oil prices declining. Now, we look at sort of the virgin oil market and those prices are actually increasing as a result. And so that's just one example of how weather and climate can impact. So clearly, you know, crop and food issues, health issues can surface, I think less important to health, but important, you know, economic growth could be hampered. So there's all these different factors that we're contending with. And so if we think about investment case, you know, as demand for water solutions grow, think if you're an equity investor, you can find opportunities in companies solving water stress issues primarily through innovation. And you know, where, think of water as an investment, you know, it's, it's just, uh, you know, thinking about what types of water companies can we find investment opportunities. And so, you know, if I think about what are some of those services, what are those innovations, if you will, that the water markets or water stocks provide? You know, it's going to be better water equipment and infrastructure. So think pipes, pumps, you know, think about our aging infrastructure here in the US. It's going to be better innovation in technology.So think about companies that provide smart irrigation equipment, companies that provide water meters. You're going to need better pollution mitigation. So companies that provide water and wastewater treatment. There's also a cleaning and sanitation component. You know, think about some of these stocks that could be opportunities. Other areas. I think are interesting. Water utilities. I mean, these are it's necessary. You know, costs continue to go up. I mentioned drought. And so clearly there's water stress in the US. I think as an individual consumer, homeowner, you know, I don't think I was prepared for how much water utility bill would be a part of our monthly budget. But it is increasing and it's going to going to continue. And so, you know, water utility companies are interesting because they got, you know, pricing power. They just pass it on to a consumer. So there's an investment opportunity. And then another area that I think there's going to be a lot more progress is in sort of that nextgen tech, I would classify sort of water desalination equipment in that category. So these are just some of the areas where when I think of water as an investment opportunity that, you know, investors can consider.

Linda Rogers: [00:10:42] Yeah. And of course, having a fund to be able to get kind of a diversified basket of some of these holdings is helpful. And that's kind of how your, your ETF comes in. So PHO is the Invesco Water Resources ETF? How would you say it kind of compares or differs from other water-focused ETFs that are on the market?

Rene Reyna: [00:11:06] Sure. So you're exactly right. You do not have to comb through the water stock universe and decide what is the best company to buy in the ETF marketplace. You can own a diversified basket of companies that provide pure exposure to this particular theme. When I look at the water ETF market, you essentially have about eight pure plays. The assets in those eight funds are, you know, approximately $5 billion. What's unique about Invesco is three of those eight funds happen to belong to Invesco. So we have PHO, the Invesco Water Resources ETF we have and that's more of a US sort of version of this fund. We have an international version PIO and then we have another fund we acquired from when we acquired Guggenheim ETF Business in 2018. That ticker was CGW. So we have three water ETFs under our lineup and we are the largest. So that puts us at about look at our assets, about 62% of the market share. PHO, so Invesco Water Resources is the largest. So if I think about what differentiates us, I think first track record, we have the first water ETF in the ETF industry. So it was in December of 2005. We're approaching 18 years of track record. I think two is the size. It is the largest pure-play water fund at 1.7 billion. Our methodology I consider unique. We do have a screen in our portfolio where you sort of identify the companies that have water revenue. So you're looking at. Um, uh, from a revenue source and a theme source. Who are the companies that are participating? There's also a screen that looks for companies that participate in the quote unquote, green economy. And so this is where sort of that sustainability lens comes into play. So think, think that's unique. And then the other side of it is our modified market cap weighted exposure. And so what that means is, um, you know, we set caps or limits from a market cap perspective or weighting, so we cap it at about 8%. Um, and most of those companies that can have an 8% weighting there's a cap of of four. And if I look at those four companies, you know, these are, you know, Roper is a company that provides water meters, leak detection. They're going to be a top holding in our important to the theme. Ecolab - You know, water and waste treatment they're important - they're top holding the theme. Ferguson - it's actually a UK company, but they serve primarily the US. This is a top plumbing and piping company, you know, clearly important to the theme. And then Danaher, which is a unique name that you don't generally see in a lot of water portfolios. They focus on water quality optimization, water quality analysis, and so you have a real heavy weight to what I would consider very important companies in this theme. So I think that makes it unique. And then the last part is the Invesco sort of angle, which I kind of portrayed here as we are the leader in this space. We have three of the eight pure-play funds and we are the largest provider. So that's kind of how I would describe and differentiate, you know,PHO, versus some of our competitors.

Linda Rogers: [00:14:35] Yeah, very helpful. And I mean, just to give people some tangible examples, could you perhaps point out one of those holdings and kind of how that company is participating specifically in water sustainability going forward?

Rene Reyna: [00:14:51] Yeah. So that's mentioned in that methodology component that we have sort of this screen participated in the green economy, actually have quite a few examples I think are interesting. I'll try and speak to them quickly here. The first one is Advanced Drainage Systems. You know, they make pipes, stormwater drainage solutions. They are the largest plastic recycler and here in the US and they use recycled plastic for half of its pipes. So, you know, really from a sustainability standpoint, an important company in the theme. American Water Works is the largest water utility. In Barron's publication I referenced earlier. You know, they have they were one of the 100 most sustainable companies for the fifth consecutive year through 2022 Ecolab. I think that's a company I've mentioned water optimization, wastewater treatment. They're also partnering with Water.org to improve water access and sanitation to India. So I think that's unique and interesting. Maybe I'll just give you one more Tetra Tech. You know, this is a company that they consult. They provide engineering solutions for the water, for water, for the environment. And in 2021, Newsweek listed Tetra Tech as one of America's most responsible companies. So there's just a few, you know, four examples of companies in who that participate in water sustainability.

Linda Rogers: [00:16:15] Great. Anything else that you want to share with investors that are interested in sustainable investing?

Rene Reyna: [00:16:23] Sure. So, number one, I think an allocation to water can be systematically captured by a rules-based transparent index methodology like an ETF provides. I think two, you know, simply stated, there's just no substitutes for water. It's an essential commodity. I think it's worthy. It's a worthy investment for investors to focus on. You know, anyone that has sustainability or longevity in mind for their portfolio I think this is a great theme to get exposure to. And you know, the last component is, you know, I want you to if you're thinking about getting exposure, you know, consider Invesco. I mentioned we are a leader in this space. We've been committed to this space for a long time. We have a lot of good options. And, you know, we hope that you consider PHO if you are looking to get exposure to the water theme.

Linda Rogers: [00:17:18] Good. Well, this was so helpful. What is the best way for people to stay in touch with you?

Rene Reyna: [00:17:23] So I think the easiest way is via email. You can find me at rene.reyna@invesco.com.

Linda Rogers: [00:17:36] Wonderful. Well, thank you so much for joining me.

Rene Reyna: [00:17:39] Thank you, Linda. Pleasure to be on your podcast today.

Linda Rogers: [00:17:44] There are many different ways to invest in the water space, from individual stocks and bonds, funds like PHO that make it easier for you to own a diversified basket of water stocks, private investments, crowdfunding. I'm writing more about these options in detail on my personal blog - www.lindavrogers.com and plan to have at least one more guest on this topic on the podcast. Keep submitting ideas on guests and topics that you want to learn more about.

Linda Rogers: [00:18:14] My name is Linda Rogers and this is Investing Forward. If you liked what you heard, leave us a rating. Subscribe and stay tuned for next time.

Linda Rogers: [00:19:33] Linda Rogers is the owner of Planning Within Reach, a registered investment advisor, Planning Within Reach produces the podcast and makes it available on its website and through other distribution channels. Linda Rogers and any guest on the podcast are providing their own views and opinions and are not necessarily the views and opinions of Planning Within Reach. Nothing on the podcast should be construed as a solicitation or offer or recommendation to buy or sell any security investment. Advisory services are only provided to investors who become Planning Within Reach clients pursuant to a written investment management agreement. Clients of Planning Within Reach may hold positions in securities discussed in this podcast. Past performance is no guarantee of future results. All investments involve risk and may lose money. The Investing Forward podcast is for informational purposes only and should not be relied on for any investment decisions. Consult with a financial advisor, accountant, attorney, or conduct your own due diligence.

Linda Rogers, CFP®, EA, MSBA is the owner and founder of Planning Within Reach, LLC (PWR). Originally from New Jersey, Linda services clients throughout San Diego County and nationwide. She leads the design of PWR's investment portfolios which utilize broad, low-cost investments that integrate environmentally, socially, and governance (ESG) factors.

Planning Within Reach, LLC (PWR) is a fee-only and fiduciary wealth management firm offering one-time comprehensive financial planning and ongoing impact-focused investment management services in San Diego and nationwide. PWR is a woman-owned firm that specializes in busy professionals and impact investors. Planning Within Reach, LLC and their advisors do not receive commissions and do not hold any insurance licenses or brokerage relationships.