Investing in Water Could Pour On the Returns

If you're thirsting for an interesting investment, you might want to think about water. Investing in the precious resource could prove very lucrative over the next decade as its use in consumption, agriculture, sanitation and industrial production surges. Putting some money into the commodity before it becomes even scarcer could be a good way for investors to make what's a green investment turn into real green.

Why invest in water? It's a natural resource that has a limited supply and no true substitute. As the economies of developing nations continue to improve, water use is expected to increase. A recent report from the United Nations estimates that about 1.1 billion people worldwide do not have access to fresh drinking water -- and 2.6 billion do not have adequate sanitation systems.

Solving those problems by building and renovating water-system infrastructure, developing technologies to purify water and transporting water to people who need it present powerful financial and investment opportunities. To meet the coming demand, some analysts project the world may need to spend as much as $1 trillion per year through 2030 applying technologies to conserve water, maintain and replace water-related infrastructure and to construct sanitation systems.

Water Mutual Funds

The Calvert Global Water Fund (CFWAX) is one way investors can take advantage of the potential opportunities in water. The fund invests in companies that are water utilities, involved in water infrastructure (such as construction or consulting firms) or developers of water technologies (such as desalination and purification techniques). Calvert Investments says the fund does not invest in bottled water companies because of concerns over recycling waste, and because Calvert has added sustainability criteria to the standards it uses to select stocks for the fund.

Jens Peers, portfolio manager for KBC Asset Management and the lead manager of the Global Water Fund, says the valuations and fundamentals of companies in water industries, as well as firms they may subcontract out to, could experience substantial growth in the near future. He believes utilities could grow by the global gross domestic product rate plus 1% or 2% per year over the next five years.

Water infrastructure firms could grow by double the global GDP rate annually over the next 10 years, but in China, that growth would be 15% to 20% or more each year due to its tremendous demand for water. Within the technology space, he says specific niches will enjoy different rates of growth.

High Growth Rates

For activities like desalination, Peers says annual growth rates could average 15% growth rates for the next 5 to 10 years. "There are companies that will have growth rates of 50% to 100% over the next two to three years because they are exposed to a specific niche that suddenly is supported by new regulations, or they serve a market that didn't exist before, or because they provide a solution to problems that weren't there before," he says.

Kelly Wright, managing editor of the Investment Quality Trends newsletter, says that although he believes "water is the next oil" as investment go, the best way to get in on the action in water is to be targeted. Wright suggests focusing investment in the development of desalination plants. The Caribbean and the Middle East already rely heavily on desalination and have plans to pour billions into process in the future. The development of desalination plants in California also bodes well for growth the industry in the U.S.

"Desalination is probably the better growth play in the water industry looking out the next few years," Wright says, noting that a company like Consolidated Water (CWCO), which has a virtual monopoly on the Caribbean market and is expanding to Saudi Arabia could do well.

He does, however, caution against investing in water utilities. "They've all been bid up pretty good and their yields are pretty low," he warns, adding that as highly regulated entities, governments could always cap what they could charge, thus limiting their profitability.

Few Funds to Choose From

The Calvert fund invests in 47 companies from a list of about 130 that meet specific investment criteria and sustainability requirements.

Peers says that 80% of the fund must be invested in companies that realize the majority of their revenues from water or are part of one of the more widely accepted water industries. The other 20%, he says, is invested in market leaders in the space. "They may not be part of those water industries, but must have at least 10% of their revenues coming from water," he says.

Some of the companies in Calvert's portfolio are utilities California Water Service (CWT) and American Water Works Co. (AWK), infrastructure firms Pentair Inc. (PNR) and Flowserve Corp. (FLS) and technology firm Kurita Water Industries (KTWIF).

The Calvert Global Water fund is one of very few mutual funds that invest in water industry companies. With roughly $32 million in assets, it is also a small fund, an indication of how few investors view water as an investment opportunity. The fund was up 4.4% since the start of the year.

Other funds in the water space include the Kinetics Water Infrastructure Fund (KWINX) with $28 million in assets and down 0.45% this year or the PFW Water Fund Class A (PFWAX) up 8.3% with $23 million in assets. Water ETFs include the PowerShares Water Resources (PHO), which focuses on industrial firms, has $1.3 billion in assets and is up 5.2% for the year, and the Claymore S&P Global Water Fund (CGW), which is in the utilities category with $248 million in assets and is up 1.3% this year.