By Ciara Linnane, MarketWatch
With global demand for water expected to explode in the coming years, fund managers are recommending investing in the space as a long-term bet on an essential commodity whose supplies are limited.
World Water Day has triggered a flurry of reports on and analyses of the challenge facing many countries as incidents of drought increase and climate change makes dry regions even drier. The United Nations World Water Development report for 2018 , published earlier this week, warns that almost 6 billion people are likely to live in areas that suffer water shortages for at least one month a year by 2050, up from 3.6 billion today.
The dire situation facing Cape Town, South Africa, a city of 4 million, has further highlighted the problem. Cape Town is gearing up for Day Zero, a date in the future when it is expected to turn off its municipal water supply, which has dwindled to life-threatening levels after a prolonged drought.
There are different ways to invest in water, starting with simply buying the shares of those companies that make everything from pipes, pumps, meters, filters and other equipment and infrastructure, to investments in the water utilities and environmental-services companies that clean, purify and distribute it.
“Technological advances are changing the ways in which water is managed and used, giving rise to a range of investment opportunities,” said Hubert Aarts, Impax Asset Management Ltd, Portfolio Manager, Pax Global Environmental Markets Fund (NAS:PGINX) . Almost 6 billion gallons of treated water are lost in the U.S. every year because of poor infrastructure, he said, making that a prime area for improvement.
“Crises can act as catalysts for corporates, governments, and broader society to focus on building resilient water systems. We continue to watch the Cape Town crisis to understand how this event might create opportunities for water-focused investors in the near term.”
Sebastian Vanderzeil, Cornerstone Capital Group
Investors can also invest in exchange-traded funds that group baskets of stocks with exposure to the commodity. These include the Guggenheim S&P Global Water Index (PSE:CGW) , which comprises 50 stocks of companies that are expected to benefit from rising water demand.
The list includes utilities, infrastructure companies and the makers of equipment, instruments and materials, and names like the utility American Waterworks Inc. (NYS:AWK) ; Danaher Corp. (NYS:DHR) , which makes purification systems; and France’s Veolia Environnement SA (PAR:FR:VIE) , a water-treatment company.
Then there’s the PowerShares Water Resource Portfolio ETF (NAS:PHO) , a U.S.-centric fund comprising 36 holdings with an emphasis on midcap and smaller-cap companies that make products aimed at water conservation and purification for consumers, businesses and industries. Stocks in the fund include Waters Corp. (NYS:WAT) , which makes water quality products and screening systems to detect toxins; Ecolab Inc. (NYS:ECL) , which offers water treatment services; and Roper Technologies Inc. (NYS:ROP) , which makes pumps and metering equipment.
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The PowerShares Global Water Portfolio ETF (NAS:PIO) tracks the Nasdaq OMX Global Water Index and leans toward large-cap growth and value stocks of companies creating products to conserve and keep water clean. The fund includes names like Switzerland’s Geberit AG (SWX:CH:GEBN) , which makes toilets and piping systems; France’s Suez SA, a water-treatment company; and the U.K.’s Severn Trent PLC (LON:UK:SVT) , a water utility.
Pax’s Aarts said the number of companies in the water value chain has grown significantly since his firm first started investing in water in 2002.
“The drivers behind this growth are strengthening and present a broader investment opportunity than might first be considered,” he said. Concerns about water scarcity and quality are gradually moving up the agenda of governments worldwide.
A growth story
One of the Pax Global Environmental Markets Fund main holdings is Suez, along with Siemens AG, Sealed Air Corp. and Waste Management. The fund invests in companies “that are developing innovative solutions in the areas of energy (renewable energy and energy efficiency), water (water infrastructure and technologies, pollution control), waste (waste management and technologies, environmental support services) and sustainable food and agriculture,” said Aarts.
“We believe the leading companies in these markets are fast becoming major drivers of global economic growth,” he said.
Cornerstone Capital Group said investors should proceed with some caution, however, as water financing trends show that while private investing activity in the water sector has grown since the 2000s, “attractive opportunities remain limited, and recent interest has been concentrated in the intersection of water and technology.”
Those who want to use their capital for technology and infrastructure upgrades are heavily reliant on government. California, for example, reacted to the drought that began there in 2015 by investing in groundwater management and wastewater treatment plants, and developing policies that would better match resources and balance supply with demand.
“Investors seeking to ensure water supply or demand efficiency in California had few options,” analysts led by Sebastien Vanderzeil wrote in a report published Thursday.
Still “crises can act as catalysts for corporates, governments, and broader society to focus on building resilient water systems. We continue to watch the Cape Town crisis to understand how this event might create opportunities for water-focused investors in the near term,” said the report. (MPH@GW, the online MPH program)
Investors seeking pure-play water stocks can consider Xylem Inc. (NYS:XYL) , a water technology company that was spun out of ITT Inc. (NYS:ITT) in 2011. There’s also Evoqua Water Technologies (NYS:AQUA) , which went public last November; it makes filtration products to remove impurities from water.
But with few others to invest in, Cornerstone said investors need to think more broadly about the future of water and suggested thinking in terms of themes, such as the Internet of Things, or the many ways our homes and daily lives are wired with electronics and sensors. “Advanced sensors help to enable the IoT in water,” said the report.
3-D printing is another technology that will likely be used to crease membranes for water filtration. For now, they are unable to accurately print at an industrial scale, but that is expected to change as the technology evolves.
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In the fixed-income space, Cornerstone suggests green bond strategies as a way to get exposure to water. “While these strategies are not exclusively focused on water, water investments, often those related to infrastructure upgrades, will usually account for some percentage of the fund,” said the report.
Municipal bonds are a more direct play on water, wastewater and sewage-treatment facilities at state or local level.
One other company that is benefiting from water is Texas Pacific Land Trust (NYS:TPL) , which is typically viewed as a Permian Basin play. The trust was created in 1888 after a reorganization of the Texas and Pacific Railway Co. following receivership. Today, it manages about 888,333 acres in 18 counties in, according to its website, and receives royalties from oil and gas, grazing leases—and water sales.
In June 2017, the trust announced the formation of Texas Pacific Water Resources LLC, a company that is focused on offering water to operators in the Permian Basin, who require large amounts of water for hydraulic fracking.
It its most recent quarter, water sales rose 172% to $6.0 million from $2.2 million in the year-earlier period. That brought the full-year total to $25.5 million, a 214% increase from 2016. The stock has risen eightfold in the last four years.
Then there is Lindsay Corp. (NYS:LNN) , which offers irrigation services, including the manufacture and marketing of center pivot, lateral move, and hose reel irrigation systems. The stock has gained 10% in the past year.
Lindsay’s competitors include Valmont Industries Inc. (NYS:VMI) and Toro Co. (NYS:TTC) , which have irrigation business segments.
Companies are focusing on water management
Water management has become an increasing priority for public companies, according to a recent report by sustainability nonprofit Ceres that sought to measure the progress made by more than 600 of the biggest listed companies in the U.S. in meeting environmental and cultural goals.
The report found that 81% of companies in industries that require relatively large amounts of water — for example, the manufacturers of food and beverages, clothing and semiconductors — have water programs in place, but just 37% of them have set targets for prioritizing action in areas that pose the greatest risk to water resources.
The Guggenheim S&P Global Water Index ETF has gained 9% in the last 12 months, while the PowerShares Water Resources ETF has added 17% and the PowerShares Global Water (NAS:PIO) has risen about 13%.
The S&P 500 (S&P:SPX) has advanced 12% in the same time frame, while the Dow Jones Industrial Average (DOW:DJIA) has gained 17%.