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Brennan Investment Partners LLC-Investing in Global Water Stocks

                 William S. Brennan, Portfolio Manager
 ...
Disclaimer

                                                                           •The Case For Water
 NO ECONOMIC S...
•Introduction to Brennan Investment Partners



 Value-based investment firm targeting clients with two portfolios in the...
Investing in Global Water Infrastructure

Industry Overview                                                             Gl...
Investment Themes

                                                      Water Overview - Market Size & Profile of Compani...
The Investment Thesis For Water-Utilities and Industrials

                                                         Return...
Where We Invest


Regions where we invest
•   US
                                                Water
•   Asia          R...
Los Angeles 9/09                               Bethesda, MD 12/08

In 2009, the American Society of Civil Engineers rated ...
The Investment Thesis For Water – U.S. Drivers

Underinvestment in Infrastructure                                         ...
The Investment Thesis For Water - US Drivers

•Forecast of Capital Expenditure in US Water and Wastewater Infrastructure 2...
The Investment Thesis For Water - US Drivers

Economic drivers

•   Growth in demand, caused by massive industrial
    exp...
The Global Investment Thesis For Water

•44% (2.8 billion) of the worlds population lives in areas of severe water stress
...
The Global Investment Thesis For Water


Emerging Markets                                           •Global average of vir...
Investment Themes– BRIC Drivers

                  Population growth rates and sizes, power generation, and wastewater tre...
Snapshot - China Water Sector Fundamentals



China Overview

•   China plans to invest US $128 billion in water related p...
Industry Trends

                                              •Expenditure forecast on desalination and water reuse 2007-...
Industry Trends

                                               Water equipment market forecast 2007-2016
•   Water distri...
Industry Trends

•   Water technologies such membrane                 •Expenditure forecast for water technology 2007-2016...
Addendum




Portfolio Offerings & Construction
          Investor Communication
         Investment Professionals




   ...
•The Offerings


Our Global Water Solutions composite uses a multi-cap value investment strategy to invest exclusively in ...
•Idea Generation
                                                   •Idea Generation – Water Solutions Universe



       ...
•Investment Process
                                                •Investment Process-Water Solutions Universe



      ...
•Idea Generation
                                                     •Idea Generation – Global Water Relative Yield



  ...
Trade Discipline


Evaluate                                   Re-assess
•If one or more of the following occurs,   •then…
...
•Investor Communication & Frequency

 Sales Channels
   Flash Commentaries                                           Mon...
Biography

William S. Brennan, Portfolio Manager

William S. Brennan serves as the Portfolio Manager of The Kinetics Water...
Brennan Investment Contacts


Contacts

William S. Brennan
President/Portfolio Manager
Office: (610) 727-6828
Facsimile: (...
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Brennan Investment Partners Slide Deck Final 2009 (3)

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  1. 1. Brennan Investment Partners LLC-Investing in Global Water Stocks William S. Brennan, Portfolio Manager October 2009 The Case for Water Investing FOR FINANCIAL PROFESSIONAL USE ONLY
  2. 2. 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 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 and economic 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 also risks 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 than investment 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 directly in 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 public or 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 any person 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 Adviser may 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 of industry-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 react comparably 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 often have 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 a greater 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 than those associated with U.S. investments. Additional risks associated with investment in foreign securities include currency fluctuations, political and economic instability, differences in financial 2 reporting 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,
  3. 3. •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
  4. 4. Investing in Global Water Infrastructure Industry Overview Global Water Infrastructure Snapshot • $700 Billion industry comprised of 550+ publicly traded Industry Size ($Billion) $600-700 companies Publicly Traded Water 550+ • Global industry growth rate: 6-8% Developed countries / 10- Companies 15% emerging countries Aggregate Market Capitalization $2 Trillion • Stimulus spending in U.S., EU and China is accelerating Developed Country Growth 6 – 10% present growth rates. Rates Emerging Market Growth Rates 15% The Case for Investment Chinese Growth Rate 15 – 20% • Water is a unique commodity with no substitute or alternative and high future demand. Since 1989, water prices have risen faster than oil with minimal volatility Water Oil • Global water infrastructure suffers from under-investment— Annual Price 6.3% 6.2% although global spending in the space has tripled since 2004. Increase 1989 – US and China account for 50% of global water spending. 2008 Annual Price 4.2% 42.9% • Asia and emerging markets infrastructure build out/ U.S. water Volatility infrastructure replacement representative of global water spending activities. 4
  5. 5. Investment Themes Water Overview - Market Size & Profile of Companies Water Subsectors within the Portfolio Subsector Revenues ($B) • Industrials – Approximately 52.1% US Global • Membranes Utilities 27 325 Treatment 24 125 • Filters Industrial treatment 22 70 • Desalination Infrastructure 12 30 Valves 8 35 • Chemicals Filtration 12 25 • Pumps/motors/valves Pumps 5 25 • Emerging technologies Other equipment 24 58 Total 134 693 • Water Utilities-Approximately 42.5% • Water Dependent Themes – Approximately 5.4% • Agriculture, Hydroelectric • Source: Brennan Investment Partners LLC 5
  6. 6. The Investment Thesis For Water-Utilities and Industrials Returns of U.S. Water Utility and Water Industrial Stocks vs. Major Water Utilities and Industrials Overview Indices Water Utilities and Water Industrials have outperformed in each period with no negative returns • Low correlation investment that has outperformed the broader indices 1989 – 1993 – 1998 – 2003 – 1989 – Sector/Index 1993^ 1998 2003 2008 2008^ • US water rates are projected to increase 2-5x over the next five years Water Utility Stocks 14.78% 18.51% 6.36% 6.36% 796.91% • Water Utilities are the hub of most water Water Industrial infrastructure spending 18.02% 16.09% 9.38% 7.25% 751.84% Stocks S&P 500 Energy • Increased utility spending equals increased 6.85% 16.60% 6.56% 13.43% 625.82% Index revenues for water industrials S&P 500 Health 8.53% 35.04% .14% -.73% 505.55% Care Index • As water utilities increase spending, water rates rise DJIA 15.44% 22.28% 4.55% -1.12% 401.17% S&P 500 14.54% 24.05% -057% -2.19% 282.92% • Increased capital spending justifies higher rates and higher returns for the utilities S&P 500 Financial 12.64% 27.09% 5.91% -12.48% 265.38% Index NASDAQ Composite 15.28% 23.47% -1.45% -3.95% 272.45% 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 6
  7. 7. Where We Invest Regions where we invest • US Water • Asia Region Country subsector & opportunity • Canada • South America • European Union • Middle East Country specific • China • U.K. • Hong Kong • Water is Life • Switzerland • Japan •50% of hospital beds globally occupied by • France • Philippines people suffering from water borne illness • Italy • Singapore • Greece • Thailand 14% of U.S. healthcare costs are related to • Germany • Brazil water borne illness (John Hopkins) 7
  8. 8. Los Angeles 9/09 Bethesda, MD 12/08 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. Harimann, TN 12/08 New York City, 7/07 8
  9. 9. The Investment Thesis For Water – U.S. Drivers Underinvestment in Infrastructure OVERVIEW OF U.S. WATER ASSETS •Drinking Water: 53,000 water facilities for public drinking water. • The U.S. is $600 Billion behind in spending on Received a D- grade from the American Society of Civil drinking and waste water systems - this expected to Engineers in 2009 pass $1trillion by 2020 •Opportunity: Publicly held operators will acquire smaller • Much infrastructure is over 100 years old and in municipal utilities disrepair - 30% of water wasted through leakage •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 Population Growth & Increased Usage water per year • U.S. water demand has tripled in 30 years while the •Opportunity: Water utilities will “Upgrade & Build” - The population has only grown 50% estimates (in 2000 dollars) of U.S. clean water needs for building new and updating existing wastewater treatment plants, sewer • Inelastic Demand: Usage continues to increase as maintenance/construction, and combined sewer overflow reuse and reclamation technology has limited corrections were $57.2, $67.9, and $50.6 billion, respectively availability •Pipes: 2 million miles of drinking and waste water pipes. >60% are beyond their intended lifespan at the end of 2010. U.S. pipes Regulation experience 30% leakage rates on average—wasting 7 billion gallons of clean drinking water each day. • EPA will become more active in water regulations in •Opportunity: Replacement is inevitable - Next generation next 12 months since there have been no significant replacement pipe will have leak monitoring/energy recovery built in changes to the Federal water regulations in over 20 place years 9
  10. 10. The Investment Thesis For Water - US Drivers •Forecast of Capital Expenditure in US Water and Wastewater Infrastructure 2007 - 2016 • Source: Global Water Intelligence 10
  11. 11. 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 •Demand for Water in the US is Growing the Fastest markets such as California and the U.S. Southwest Where it is Least Available 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 .
  12. 12. The Global Investment Thesis For Water •44% (2.8 billion) of the worlds population lives in areas of severe water stress 12
  13. 13. The Global Investment Thesis For Water Emerging Markets •Global average of virtual water content of selected products (per unit of product) • Population rates, resources, lack of availability, Water Content agriculture and wastewater are key industry drivers Product (gallons) • Asia accounts for 60% of world’s population and 1 glass of beer 20 36% of world’s resources – highest water stress 1 glass of milk 53 area 1 cup of coffee 37 1 slice of bread 11 • 70% of all water used on a daily basis is agriculture related. Food price volatility will be a 1 slice of bread w/cheese 24 continued to escalate. 1 apple 18 1 cotton T-shirt 528 • As emerging markets develop, dietary habits 1 glass of wine 32 change, food consumption increases …water usage increases accordingly. 1 glass of apple juice 50 1 glass of orange juice 45 • Food demand is projected to grown 70-90% by 1 egg 36 2050 1 hamburger 634 • Water is a major economic constraint for many 1 orange 13 parts of the world, namely China 1 pair of leather shoes 2114 13
  14. 14. Investment Themes– BRIC Drivers Population growth rates and sizes, power generation, and wastewater treatment drive demand. • 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. Source: “Water Worries” by Citi (2008) “Water, Water Everywhere, but Not a Drop to Drink” by RBC (2008) 14
  15. 15. 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
  16. 16. Industry Trends •Expenditure forecast on desalination and water reuse 2007-2016 • Desalination will emerge as a viable option (U.S.) 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 Trent 16
  17. 17. Industry Trends Water equipment market forecast 2007-2016 • 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
  18. 18. Industry Trends • Water technologies such membrane •Expenditure forecast for water technology 2007-2016 (U.S.) 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
  19. 19. Addendum Portfolio Offerings & Construction Investor Communication Investment Professionals 19
  20. 20. •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 manufacturers 20
  21. 21. •Idea Generation •Idea Generation – Water Solutions Universe •# of Companies Eliminate deep cyclical businesses 500 •Approximately 9 sub-sectors •1 •Require 12% earnings growth over 280 •next 3–5 years per annum 130 •Minimum market capitalization of •$150 million •2 80 •Define businesses in universe •Perform fundamental analysis to 50 •3 •confirm quality standards •4 •Target Portfolio (30 companies) 30 21
  22. 22. •Investment Process •Investment Process-Water Solutions Universe •# of Companies •Financial Model Strength •Growing cash flow/internal financing •13,000 500 •1 •High / rising profit margins •Low debt •5,900 280 •Market Leading Position •Competitive Advantage •2,100 130 •Consistent Growth •2 •Unit volume increase •316 •Fee based business model 80 •Recurring revenue •120 •3 •Management Style 50 •Cash flow management •30 •Process •4 •Responsive 30 22
  23. 23. •Idea Generation •Idea Generation – Global Water Relative Yield •# of Companies •Evaluate global water utilities and pipe •110 • manufactures •1 •Require 12% earnings growth over •50 •next 3–5 years per annum •45 •Minimum market capitalization of •$150 million •2 •30 •Identify highest yield businesses in universe •3 •Perform fundamental analysis to •30 •confirm quality standards •4 •Target Portfolio (15-20 companies) •15 23
  24. 24. Trade Discipline Evaluate Re-assess •If one or more of the following occurs, •then…  Stock down relative to • industry peers  2 consecutive quarters of •Upgrade • earnings disappointment •or  Major change in • Company or Industry • Fundamentals •Buy •or  Stock grossly overvalued •Sell 24
  25. 25. •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. 26. Biography William S. Brennan, Portfolio Manager William S. Brennan serves as the Portfolio Manager of The Kinetics Water Infrastructure Fund. He is the founder, President, and Portfolio Manager of Brennan Investment partners LLC, a registered investment advisor that focuses on water, infrastructure and sustainability 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 and also served as the Portfolio Manager of the Praetor Global Water Equities Fund in Luxemburg through August 2008. He was also responsible for the portfolio selection for the Claymore Global and Domestic Water UITs, the first water investment products launched in the US. Mr. Brennan served as a Portfolio Advisor / Analyst to Summit Water Partner, a San Diego based global water hedge fund from inception through February 2006 as well as the co- Portfolio Manager of the Praetor Water Fund with John Dickerson, the hedge fund portfolio 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 in Atlanta. Mr. Brennan is a graduate of Lehigh University with a BS in Mechanical Engineering / Biology, where he was a distinguished graduate of the Air Force ROTC program and a starter on both the varsity football and baseball teams, an MS in Biomedical Engineering from Colorado State University, and an MBA from Villanova University, where he is and has been an adjunct professor in the graduate MBA program for the past ten years. 26
  27. 27. Brennan Investment Contacts Contacts William S. Brennan President/Portfolio Manager Office: (610) 727-6828 Facsimile: (610) 727-6905 Mobile: (610) 304-2729 E-mail: wbrennan@brennaninvestment.com Daniel Aboyan Managing Director, Corporate Development/Marketing Office: (610) 727-6834 Facsimile: (610) 727-6905 Mobile: (610) 212-1550 E-mail: daboyan@brennaninvestment.com Geoffrey Morrissett Director/Principal Office: (610) 727-6834 Mobile: (415) 652-6214 Facsimile: (610) 727-6905 E-mail: gmorrissett@brennaninvestment.com 27
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