For advisers thirsty for new opportunities, the case for water investing is crystal clear. The global population is expected to grow by 1.2 billion to 8 billion over the next 15 years, and less than 1% of the planet's water is currently potable and accessible, meaning massive investment in water infrastructure will be needed to keep up with growing demand.
“It's not very sexy, but gradually, people are becoming aware of the opportunities and problems related to water,” said Jens Peers, manager of the $33 million Calvert Global Water Fund (CFWAX) and head of the Eco funds at KBC Asset Management Ltd., which has $1 billion under management in water-related investments. “People are starting to realize water is the only commodity that there's no substitute for, and it's also the only one that we absolutely need in order to survive.”
Only a handful of mutual funds and exchange-traded funds currently offer pure-play exposure to water infrastructure, but water is on its way to becoming a legitimate investment category.
Four examples of ETFs that offer exposure to the water industry are PowerShares Global Water (PIO), PowerShares Water Resources (PHO), Claymore S&P Global Water (CGW) and First Trust ISE Water Index (FIW). The domestic PowerShares Water Resources was launched in 2005, and the rest were launched in 2007.
“The water industry has never been categorized like everything else on Wall Street, and it was that vacuum of research and knowledge that attracted us to it as value investors,” said John Dickerson, president and chief executive of Summit Global Management Inc., a $600 million hedge fund and private-equity firm that specializes in water-related investing.
Mr. Dickerson, who has been investing in water through a long-short equity hedge fund since 1999, has been researching the market since the late 1970s when, as treasurer of a not-for-profit water district, he saw how much free cash flow was being generated in the water industry. He has created a database of 394 companies that he has identified as part of the “hydrocommerce” industry.
Two examples of stocks from that universe he currently owns are Aqua America Inc. (WTR), which operates several regulated utilities providing water or wastewater treatment services, and American Water Works Company Inc. (AWK), which is the largest water utility servicing the United States and Canada.
“The lure of water investing is not a new idea, but it is one that deserves fresh examination from the perspective of the revised business expectations and new economic environment to emerge from the wreckage of 2008,” he said. “We believe water stocks represent an attractive alternative store of value in an uncertain world, and it's a good place to save money for a rainy day.”
For investors, the water industry's growth is being driven by supply-and-demand fundamentals, global infrastructure upgrades (including replacing antiquated wooden pipes in parts of the United States) and new regulations related to pricing, distribution and treatment of water.
That basic premise has caught the attention of the institutional investor market, according to a recent report by Ceres, a national network of environmental organizations and investors representing more than $9 trillion in institutional accounts. A February Ceres report, “Murky Waters? Corporate Reporting on Water Risk,” highlights water use and abuse by corporations, which is translated into investment risk and opportunity.
“Institutional investors are starting to look at water use by companies as a long-term risk to their portfolios, because that's something that companies and investors will have to address,” said Brooke Barton, who co-wrote the Ceres report as senior manager of water programs.
As a specific allocation inside a portfolio, water isn't quite there yet, but that doesn't mean it won't be in the near future.
“I think more and more people are going to be-come interested in water as an investment, and it could become a staple allocation,” said Jim Porter, founder of New Century Capital Management LLC. Of the $40 million that he manages for his clients, about 5% is currently allocated to water investments as part of an “opportunistic allocation.”
“Water hasn't really caught on yet, but the long-term trends seem to be getting established,” Mr. Porter said. “I expect it to grind away and become an important investment resource because of its scarcity.”
Questions, observations, stock tips? E-mail Jeff Benjamin at [email protected].
