A research house has suggested that investors seeking portfolio diversification should take the Australian water market into consideration.
Following the declines witnessed in global markets during the first half of the year, Evergreen Ratings highlighted the water market as an uncorrelated asset with a strong track record.
Notably, over 2021-22, the capital value of major water entitlements across the southern Murray-Darling Basin, as tracked by the Aither Entitlement Index (AEI), soared by 18 per cent.
A water entitlement is a perpetual legal entitlement to access a defined share of water from a water resource like a river or aquifer. A large proportion of water entitlement trading in Australia is contained within the southern Murray-Darling Basin.
Since its inception in 2008-09, the AEI has risen by an average of 8 per cent each year and has had a compound annual growth rate (CAGR) of 17 per cent since 2015-16 thanks to rapidly rising entitlement prices.
Aither recently estimated that the total value of entitlements in the southern Murray-Darling Basin increased 13 per cent to $30 billion during 2021-22.
The firm said that prices for high-reliability and high-security entitlements increased markedly, reflecting continued long-term interest in water entitlements and a lack of willing sellers.
One potential opportunity in the water entitlements space is the Argyle Water Fund, which Evergreen said was an “established, diversified” portfolio of Australian water entitlements.
The fund is managed by Argyle Capital Partners and targets a return of 10 to 14 per cent per year, including 7 to 11 per cent capital growth and yield of 3 to 5 per cent, averaged across a recommended investment timeframe of five to seven years.
Evergreen founder and CEO Angela Ashton said that the fund, which has returned 16 per cent a year since its inception a decade ago, had demonstrated little or no correlation with traditional asset classes and no significant correlation with short-term climatic conditions.
“The management team has over a decade of experience deploying capital in the Australian water market. It has managed the fund through several climate cycles, from flood to drought and back,” she said.
“Past performance has been strong and met targets within risk limits.”
Argyle Capital Partners currently manages around $1.3 billion of investments, including roughly $530 million through the Argyle Water Fund.
Institutional water investors own about 7 per cent of all water entitlements in the Southern Connected Basin and typical customers including large-scale water users such as orchardists which rely on additional water allocations to sustain their operations.
In its report, Aither said that the long-term outlook for entitlement markets appeared to be relatively positive, but noted that some questions were still being raised.
“A key driver of entitlement prices over the last 12 months has been liquidity. If the supply of entitlements coming to market continues to be relatively limited, prices could be pushed higher again in 2022-23,” it said.
“However, given the large price increases over the last 12 months, and as macroeconomic factors shift, there is uncertainty about how entitlement markets will perform in 2022-23.
“Interest rates and inflation have started to increase again, compounding the challenges created by rapidly rising agricultural input costs over the last 12 months. These factors, along with commodity prices and the exchange rate, could alter the investment environment for market participants.”
