There’s nothing like a drought to make a market focus on water. With California going through a multiyear drought and finally mandating a curb of water usage by 25%, the national dialogue has heated up, as have the investment possibilities.
Sustainable investing isn’t new, nor is investing in water-based financial vehicles (or killing over it; the movie “Chinatown” was about California’s water wars), but there are many layers.
“Water affects [everything],” says Richard Sandor, chairman and CEO of Environmental Financial Products LLC. “There’s many opportunities, from desalination plants to water ETFs to funds that just invest in infrastructure. Anyone interested in sustainable investment ought to have their eyes and ears open to equities that foster efficient use of water.”
Sandor, who’s also the author of “Sustainable Investing and Environment Markets, Opportunities in a New Asset Class,” understands new markets; he helped design the initial interest rate futures contracts at the Chicago Board of Trade and more recently worked to develop carbon markets around the world. Although he says his firm isn’t working with any exchanges now to develop a water futures contract, he believes other groups may be.
“Water is a critical commodity, yet it is at zero price in most parts of world,” he says. “We would basically benefit from the pricing of it … not a pricing of the infrastructure, but pricing of the commodity.”
Yet the movement is slow in coming. Some countries have developed a water rights pricing system, such as Australia, but in the United States, investment is through ETFs, mutual funds, private equity funds and purchasing outright water rights. The largest futures exchange in the world, the CME Group, would not comment on any potential water-contract projects in development.
The need for capital is huge. According to findings by Water Asset Management, a $500 million fund focusing on water-based investments, “The OECD estimates that by 2025 water will make up the lion’s share of global infrastructure investment with water spending topping $1 trillion that year. This amount is nearly triple the amounts needed for investments in electricity or transport. For developing countries alone, an estimated $103 billion per year is needed to finance water, sanitation, and wastewater treatment through 2015.”
Part of that investment interest has already begun. One example, according to the New York Times, is Impax Asset Management, a London-based sustainable asset management firm that focuses on water-related infrastructure investments. It has doubled its assets under management to $1.8 billion in the last two years.
Investment options are largely split between infrastructure and water rights. Many funds focus on the building plants to efficiently process potable water. In fact, in November 2015, the Carlsbad Desalination Project near San Diego, California, will finally open, processing 50 million gallons of drinking water a day for the local population. By 2020, it’s expected to provide 7% of the area’s drinking water.
According to Reuters, back in late 2011, there were less than a dozen pure-play water funds available for investing, totaling about $6 billion. Today BofA Merrill Lynch estimates the “size of the global market for water solutions to be $500 billion … and could be worth $1 trillion by 2020.” In a report on water investments, Kleinwort Benson noted, “Water infrastructure companies tend to be exposed to cyclical and capital spending end markets. Water technology companies tend to be niche high-growth companies driven by company-specific drivers. On the other hand, low beta, higher-dividend paying regulated utilities can provide a defensive component during turbulent markets.”
The firm concluded that taking part in water-related investments “can enhance returns.” KB also noted that over the past two calendar years, “there were over 300 M&A transactions in water, with an approximate total value approaching $25 billion.”
So where to go to “tap into” water-related investments? The largest ETFs that track water stocks include the Guggenheim S&P Global Water Fund (CGW) and PowerShares Global Water Portfolio (PIO), both focusing on water conservation stocks.
PowerShares Water Resources Portfolio (PHO) and First Trust ISE Water ETF (FIW) include water recovery stocks. These four ETFs have roughly $1.5 billion under management. None have been stellar performers this year, although longer-term plays have had healthier returns.
Other options are mutual funds that focus on various water-related indexes, such as AllianzGI Global Water A (AWTAX) or Calvert Global Water A (CFWAX), which together have roughly $900 million in assets under management. There also are private funds such as Water Asset Management and Impax that invest in various parts the business and firms that are water-related.
Another option is to purchase water rights directly, but that requires deeper pockets. They are typically owned by private equity funds or large farming companies such as J.G. Boswell and Limoneira (LMNR).
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