Why now is a good time to invest in natural capital: the case for Australian water

Natural capital, including water, agriculture, forestry, and carbon, is the third pillar of a real assets portfolio, alongside real estate and infrastructure. Of these, the WAM Alternative Assets investment team, responsible for WAM Alternative Assets (ASX: WMA) and the WAM Real Assets Fund (WRAF), holds a particularly positive view on Australian water entitlements.

We believe that most assets that are sold as “diversifiers” have an unfortunate habit of correlating with equities precisely when you need them not to. During a genuine market dislocation, this means the assets that were supposed to be uncorrelated tend to move together. Australian water entitlements are one of the rare exceptions.

This has been shown clearly in historical return data; over the past 10 years (2016 to 2026), the returns of a well-managed portfolio of water entitlements have shown slightly negative correlation to the returns of Australian (-0.28 correlation) and US (-0.15 correlation) equities. (Source: Argyle).1

The reason for this is structural. Water entitlement returns are largely independent of interest rate cycles, corporate earnings and the economic forces that drive listed markets. Instead, their returns are driven by rainfall, increasing productivity of agricultural water use and a ‘cap and trade’ framework. This policy works by a regulator setting limits on the total volume of water that can be extracted from a river or groundwater basin, depending on rainfall and inflows. Entitlement holders will then receive a water allocation, and those who don’t require their total allocation can then sell or lease it to others.

The distinction between water entitlements and water allocations matters for an investor. The entitlement is the durable asset, while the actual water allocated to the entitlement provides the income stream.

Generating income requires active management, either by selling annual allocation volumes each year, or by leasing long-term water entitlements to irrigation farmers. The extent of income generated may vary with seasonal conditions. Income is typically compressed in wet years when water is abundant and bid up sharply in dry ones when water entitlements might not receive their full allocation volume.

The vast majority of these water entitlements govern access to the Murray-Darling Basin, Australia’s most important river system (shown in the infographic below). The Basin supplies drinking water to more than three million people and underpins close to half the nation’s irrigated agriculture (Source: Australian Government).2

Scarcity reinforced by policy

The supply of water entitlements is capped, underpinning an investment case based on scarcity. Under the Murray-Darling Basin Plan, Sustainable Diversion Limits cap the total volume of water that can be extracted. This means no new entitlements can be created.

Additionally, under the federal Restoring Our Rivers program, the Commonwealth plans to recover an additional 450 gigalitres of water for the environment by the end of 2027. This will be fulfilled partly through a voluntary buyback program that permanently removes water entitlements from the consumptive pool (Source: DCCEEW Australia).³ Regardless of one’s view of the policy (and opinions widely differ), this plan reduces supply, which is already limited.

This structural tightening showed up in entitlement numbers this year. In the 2024–2025 water year, the Ricardo Entitlement Index, which tracks major southern Basin entitlements, rose 5.7%. This lifts the total market value of Basin entitlements to roughly $31.9 billion. Drier conditions reduced available water at the same time, pushing prices up sharply. In key trading zones like the Goulburn, Murray and Murrumbidgee, water allocation prices rose by 89% to 159%, reaching about $200–$290 per megalitre (Source: Ricardo).⁴

Forecasts for 2027 from various state authorities, outlined in the graph below, predict a continuation of dry conditions and lower water availability than in the previous five years.

The risks

Water allocations can be volatile. In wet years, the per unit price received for selling water allocations might be lower. Irrigation farms may have reduced water requirements due to higher rainfall, and there may be a surplus supply of water allocations. However, in wet years, entitlements usually receive their maximum allocation volumes, so higher water volumes may balance out lower prices (or vice versa).

There is also some regulatory risk. The Murray-Darling Basin Plan is due for its statutory ten-year review in late 2026, the outcome of which could reshape extraction limits and trade rules (Source: Australian Government).⁵ However, the ‘cap and trade’ framework has been in place for over 20 years. It treats water entitlements as property rights, and Governments have demonstrated that if they do wish to change access to water, they will buy back entitlements from willing sellers. The secondary market remains relatively small, with only a few per cent of entitlements traded per year. This means liquidity is tight. Water entitlements can be readily sold but may require patience to achieve fair value in some situations.

These risks are some of the reasons that the asset class rewards expertise.

Why this is a manager’s market, not an index market

There is no simple, passive way to invest in or own Australian water, as it differs across regions and there is not one, unified market. The markets are broker-mediated, opaque, fragmented across state registries, and shaped by physical constraints. Returns come from active management decisions, such as deciding which regions to invest in, setting up leases with agricultural tenants to secure income, managing unused water allocations from wet years to use in dry ones, and navigating the trade regulations on where water can be moved.

This is precisely where we believe the opportunity sits. The WAM Alternative Assets team specialises in identifying best-in-class managers in the alternatives space. In water, the key to successful investing is access to genuine local specialists with the on-the-ground expertise required to manage the asset through the cycle. We are not in the business of forecasting next season’s rainfall. Instead, we are in the business of finding the people who manage water well across many seasons.

The WAM Alternative Assets team has invested in water entitlements within WMA through our partnership with the Argyle Group, led by Kim Morison. Argyle is one a few specialists in this market - a pure-play water investment manager whose team helped pioneer the asset class in Australia in 2008.

Our conviction in Argyle rests on their deep on-the-ground knowledge, drawn from decades in irrigated agriculture and water funds management, as well as established relationships with irrigators and water brokers across the southern Murray-Darling Basin. They are precisely the kind of local specialist that the structure of this market rewards.

We also take stewardship seriously. Water is a shared resource with deep community and environmental significance, not just a tradeable instrument. Holding a scarce, perpetual asset through the cycle carries the responsibility to support Australian agriculture, encouraging more efficient, productive farming practices over time. Argyle’s Water Fund performs this role and has recently achieved RIAA certification in respect to its stewardship in Australian water markets.

Where water entitlements fit within a portfolio

Within a diversified real assets portfolio, water complements infrastructure and real estate rather than duplicating them. Unlisted infrastructure and real estate offer long-term contracted cash flows that are frequently inflation-linked, however capital value remains sensitive to interest rates. Water sits apart from both. Its drivers are hydrological and agricultural, which is exactly why it earns its place. It is the natural capital expression of the same investment thesis that runs through real assets, including real estate and infrastructure: tangible, finite, essential assets that behave differently when markets are under pressure.

This is the case for water, and it is a core reason natural capital has a strategic allocation within both WMA and WRAF.

About the WAM Real Asset Fund (WRAF):

WAM recently launched WRAF, an unlisted evergreen Fund. WRAF aims to provide investors exposure to an actively managed portfolio, comprised of Australian and global real assets strategies through a combination of primary funds, secondary funds and co-investments in real estate, infrastructure and natural capital assets.

While we view these asset classes as particularly attractive in the current market environment, we have conviction that the combination of these three broad asset classes, and the ability of the WAM team to dynamically pivot between sub-asset classes, sectors and risk spectrums, provides WRAF with the ability to generate consistently strong risk-adjusted returns.

To learn more about WMA visit: (VIEW LINK)

or WRAF visit: (VIEW LINK)

Sources:

1. Argyle Water Fund Overview and Investment Thesis, Argyle Capital, June 2026.

2. About the Murray-Darling Basin, (VIEW LINK)

3. Voluntary Water Purchase Program (Restoring Our Rivers), (VIEW LINK)

4. 2025 Ricardo Water Markets Report, (VIEW LINK)

5. The Basin Plan Review, (VIEW LINK)