Water: an investment to tap in to

 While you can’t invest directly in water – yet – you can dip into the market through specialist funds and companies supplying water technologies

Water, as anyone living in the north-west of England will be all too aware, is a scarce commodity. The area is enduring the first hosepipe ban in 14 years as a wet autumn was followed by an exceptionally dry spring and summer.

But water is a precious resource in many parts of the world – and, as the population rises and industrialisation increases, it will become more so.

Simon James, founding partner of Gore Browne Investment Management, points out that there is the same amount of water on the planet as there was a million years ago – but there are now almost 7 billion people wanting to use it. In the past century alone, demand for water has risen sevenfold.

He adds that, over the next 15 years, the world’s population is expected to grow by 18% and the proportion in urban locations by a third – and urban living demands a lot more water. The result, according to the UN, is that demand for water by 2050 is likely to be 40% more than in 2000.

Unlike commodities such as oil, timber or platinum, it is not possible to invest directly in water: it is not – yet – a directly traded commodity. Indeed Mike Fox, who runs the Sustainable Leaders Trust for Co-operative Financial Services (CFS), views it as “the one commodity where pricing does not correspond with usage. In farming, particularly, the rate paid is a pittance compared to usage – a big issue in drought-ridden places like California.”

That will have to change eventually. In the meantime, however, there are ways in which investors can make money from water. The most obvious is through the water companies such as the UK’s United Utilities – behind the hosepipe ban – or international companies such as Suez Environment in France and Brazil’s Cia de Saneamento Basico do Estado de Sao Paulo. But these are usually highly regulated, so their profits will depend more on the price they are allowed to charge than the availability of water.

Another way to tap into water is through the companies that supply engineering and other services to the industry. Ted Franks, an analyst at sustainability specialists WHEB Asset Management, says these companies – which will include everything from filtration and desalination experts to conservation and waste management – have far higher growth rates than utilities.

Their technologies should get even more valuable: the Organisation for Economic Cooperation and Development (OECD) says that investment in water infrastructure and maintenance will have to grow by 7% a year, in real terms, over the next 20 years.

Again, Britain has a few companies specialising in these areas. Fox points to Rotork, which supplies things such as valves for transportation and leakage. WHEB points out that consulting engineer Atkins is working with the Environment Agency to ensure that water resources are sustainably managed.

Again, however, the biggest opportunity is in overseas companies such as US group Badger Meter, whose water metres help control usage, or fellow American ITT, whose services include waste treatment.
 
Those who want to get exposure to water could invest directly in these companies, although getting a broad spread of technologies would require a large portfolio and a lot of research. Better to consider a fund – although, for most, the water content will be diluted by other technologies and sustainability themes. The CFS fund, for example, invests in urban regeneration and power as well as water. Sarasin’s AgriSar fund has India’s Jain Irrigation Systems as its largest holding, but is a general agriculture fund.

One way to get a pure investment in water is to buy ETF Securities’ Janney Global Water Fund. This tracks an index made up of 60 companies, half utilities and half service companies.

Rima Haddad, ETF’s equity specialist, said that, over the last six months, the water index had fallen less, at 9.2%, than global equities, as measured by the MSCI World Index, which are down 9.9%. Over five years, the outperformance is more substantial, with the Janney index up almost 60% compared with a 21.5% rise in the MSCI World Index.