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.
â€œTechnological advances are changing the ways in which water is managed and used, giving rise to a range of investment opportunities,â€ said Hubert Aarts, Impax Asset Management Ltd, Portfolio Manager, Pax Global Environmental Markets Fund PGINX,
“ â€œCrises 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.â€ ”
â€” 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 CGW,
The list includes utilities, infrastructure companies and the makers of equipment, instruments and materials, and names like the utility American Waterworks Inc. AWK,
Then thereâ€™s the PowerShares Water Resource Portfolio ETF PHO,
The PowerShares Global Water Portfolio ETF PIO,
Paxâ€™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.
â€œThe drivers behind this growth are strengthening and present a broader investment opportunity than might first be considered,â€ 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 â€œthat 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,â€ said Aarts.
â€œWe believe the leading companies in these markets are fast becoming major drivers of global economic growth,â€ 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, â€œattractive opportunities remain limited, and recent interest has been concentrated in the intersection of water and technology.â€
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.
â€œInvestors seeking to ensure water supply or demand efficiency in California had few options,â€ analysts led by Sebastien Vanderzeil wrote in a report published Thursday.
Still â€œcrises 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,â€ said the report. (MPH@GW, the online MPH program)
Investors seeking pure-play water stocks can consider Xylem Inc. XYL,
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. â€œAdvanced sensors help to enable the IoT in water,â€ 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.
In the fixed-income space, Cornerstone suggests green bond strategies as a way to get exposure to water. â€œWhile 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,â€ 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 TPL,
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. LNN,
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 â€” for example, the manufacturers of food and beverages, clothing and semiconductors â€” 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 PIO,
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