The world is getting thirstier. The World Bank estimates that global water consumption will increase by 50 percent over the next 30 years. But the planet has no more water today than it did after the Big Bang, and as with any commodity that appears to be running out, this resource is attracting new interest from investors.
No fewer than eight exchange-traded funds now specialize in water-related investments. The endowments of Harvard University and Duke University have both begun to focus on water. And last year the California Public Employees’ Retirement System committed $260 million to the venture capital firm of one of Sun Microsystems’ co-founders, Vinod Khosla. The firm seeks out emerging water technologies, among other cutting-edge investments.
The market worldwide in stocks revolving around water infrastructure alone — everything from pipes, valves and filters to desalination systems — is thought to be between $550 billion and $700 billion (about $135 billion of that is in the U.S.). William Brennan, a portfolio manager for Summit Global Management, a $450 million-in-assets San Diego–based firm that has a water hedge fund as well as a water-rights fund — a private investment pool that invests in water rights — estimates that the public market could easily grow to $1 trillion.
[Video Caption: How To Invest In Water: The first hosepipe ban in Britain began July 9 in the North West, less than a year after the region saw servere flooding. Ted Franks from WHEB Asset Management considers the sector’s investment opportunities. Airtime: Fri. Jul. 9 2010 | 6:30 AM ET]
Institutional investors have so far poured $25 billion into water-linked stocks, typically those of water utilities and water-treatment plants. The water industry’s need for funding is so great that it ranks as the fourth most capital-intensive business globally. But U.S. investors are relative newcomers to so-called blue investing.
Water investments can be as fluid as the liquid itself. “Thematically, water offers a very diverse set of opportunities for investment and trading,” says Michelle McCloskey, head of research at New York–based fund of hedge funds Man Investments, a subsidiary of London-based Man Group. Water investments encompass five distinct categories: regulated utilities; water “resources” (ownership of and access to H2O); water treatment; testing, controls and measurement; and infrastructure. These investments all offer different risks and returns. One benchmark, the S&P global water index, comprising 50 of the largest water-related public companies, this year is up 13.4 percent through July 30 and has an annualized 7.26 percent return over five years.
No single approach seems to predominate among water investors. “We invest in everything from water rights to the plumbing that delivers water,” says Marc Robert, chief operating officer of New York–based Water Asset Management, a four-year-old firm that invests exclusively in water-related equities. “We are sourced to the tap.” WAM’s $230 million TRF Master Fund, a long-short hedge fund (with a private equity side pocket), screens for companies that derive 35 percent or more of their sales from water. The fund is up 6.56 percent through July 30. Summit’s Brennan, who was trained as an environmental engineer and ran a successful water fund for three years before joining the California firm in July, contends that hedge funds are the way to go in water investing. He argues that, given the increasing number of low-cost, high-beta, water-themed ETFs,“to have a product institutionally that’s not hedged is doing a disservice.”
He also warns, “this is a tricky minefield to navigate” because of the engineering, financial and regulatory issues associated with water.
Brennan’s advice notwithstanding, some long-only water funds have been holding their own. Jens Peers, head of environmental strategies at Dublin-based KBC Asset Management, oversees a water fund that invests in about 50 public companies — including one that uses ultrasonic waves to find leaks in water pipes — and has achieved a net annualized return for the five years through June of 3.74 percent, versus the MSCI world index’s 0.61 percent. “We expect this sector to outperform by 3 to 5 percentage points annually,” says Peers. Now that calls for a toast of clear, cool water.