A handful of new mutual funds and exchange-traded funds (ETFs) invest in companies directly involved in that most basic element of human life– water.
While most people take water for granted as a routine part of daily existence, it is actually a commodity of limited supply and unlimited demand–thereby making companies involved in its provision, treatment and delivery a tremendous investment opportunity.
“Water is the one commodity where demand is not subject to the pressures of macroeconomics,” says William Brennan, president of Aqua Terra Asset Management, a specialist in the water infrastructure sector. “Water cannot be duplicated, and has no substitute. Water is virtually inelastic–as prices rise, consumption does not decrease.”
Aqua Terra, a subsidiary of investment and brokerage firm Boenning & Scattergood Holdings, is the sub-adviser of The Kinetics Water Infrastructure Fund, a mutual fund which is expected to launch shortly.
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Som Seif, chief executive officer of Claymore Investments, which recently launched the Claymore S&P Global Water ETF (CGW), says fundamentals surrounding the water and water-treatment industry are extremely bullish. “Demand for clean water supply and improved water infrastructure is growing around the globe–driven by rising population, increased industrial demand and the need to upgrade or replace the aging pipes carrying our water,” he says.
Moreover, Seif notes, there has been a gradual transition in the management of water resources away from municipalities towards larger private corporations. Consequently, infrastructure spending on water delivery systems are expected to soar, and much of that is anticipated to come from private investment.
The numbers surrounding water and its supply-demand characteristics are sobering and staggering. Water available for human consumption represents less than 1% of all water on the planet, while the renewable supply has fallen by almost 60%, Brennan notes. “Only 20% of the global population has access to running water and 40% has no access to clean water nor sanitation,” he adds. “Within 50 years over half of the entire earth’s population of more than 9-billion will be living with water shortages affecting 80 countries, including the U.S. And more demand for water means that the already under-supplied resource will become scarcer in the years to come.”
The annual cost of maintaining the infrastructure of global water systems, says Brennan, falls somewhere between $425 billion and $700 billion (including $110-billion in the U.S. alone). Brennan expects spending on the U.S. water infrastructure to accelerate, noting the EPA declared that at least 25% of the nation’s pipes are in poor shape — by 2020, that number will rise to 45%. Indeed, according to the American Society of Civil Engineers, the U.S. water infrastructure will require more than $1 trillion in repairs by 2025.
Stewart Scharf, an equity analyst at Standard & Poor’s, notes that since more than 80% of the U.S. population gets their water from government entities, he thinks municipalities “are eager to find cost-effective private sector solutions such as long-term management contracts or outright asset sales,” resulting in increased M&A activity in the water industry.
“We believe municipalities will continue to turn to private entities to help repair decaying water systems,” he adds.