The next new wave in investing — water
Water may be the next great investment commodity, says this Canadian analyst. He details the pros and cons and five ‘watery’ funds.
The next big thing in investing is something most of us have taken for granted for as long as we’ve been on earth.
Water.
In the wake of the dot-com craze of the 1990s and the credit derivatives of the 2000s, will there be a water bubble? (Sorry, had to say it.)
Many people think so, and Mr. Alex Roslin considers the case. Writing in The MoneyLetter, this independent analyst and trader discusses the case for investing in “the planet’s most ubiquitous commodity — one that’s available for free when you turn on the tap.”
There are many reasons why water promises to be an ever-more-dominant commodity in the coming century.
But investing in it may not be as straightforward as it may seem at first glance. There are many conflicting forces at play.
Mr. Roslin also introduces us to five exchange-traded funds (ETFs) devoted to water. All have been doing well.
Safe drinking water
Those who believe water will be a hot investment property call it “blue gold,” this analyst tells us.
Utilities and other companies that move large quantities of water are profiting from massive government spending on infrastructure. They are also beginning to profit from the anxiety over rising global temperatures.
And clean water is certainly needed. It is estimated that 1.1 billion people across the world lack access to safe drinking water. Mr. Roslin quotes one fund manager who says the lack of clean water is “a bigger killer than AIDS in Africa.”
“But is all this just fast-flowing hype?” the analyst asks. Lots of “sure things” have gone down the drain.
A long bull market
Mr. Roslin states the bullish case. Stimulus spending in the U.S. includes $17 billion for activities related to water. And by 2019, says the U.S. Environmental Protection Agency, $150 billion will have to be spent on the infrastructure for drinking water in America alone.
A big believer in the water boom is Mr. Benjamin Tal of CIBC Global Markets. Demand for water is doubling every 20 years, he says — and that’s twice the rate of population growth.
In the developed world, much of the infrastructure that brings us water is more than a century old (the city of Toronto, for instance, is desperately trying to replace its old water mains before they all break up).
“The water industry, America’s last great monopoly, is in the midst of a long bull market,” says Mr. Tal. “Global demand is surging while supply is eroding.” Water looks a lot like oil did during and after World War II, he adds — on the verge of a long and lasting boom.
Not necessarily green
But there are those who advise caution. Water is still under the radar of many analysts, so investments depending on water don’t get blanket coverage. And there isn’t a long history of market data to indicate how it will perform from season to season or cycle to cycle.
“In addition, water may sound clean, but that doesn’t mean it’s necessarily a green investment that would qualify for socially conscious buyers,” Mr. Roslin states.
Not least, water is really a “grab bag” that can hold anything from industrial companies to financial firms to conglomerates that don’t always trade in unison. That is, unlike gold stocks or banks, stocks dealing with water don’t constitute a “sector” that can be followed up or down.
What this means in the end is that the various “watery funds” tend to trade in lockstep with the broader market, says the analyst. That also means they have been up since March.
A more spectacular run
Before he introduces the funds, Mr. Roslin has one caveat. They tend not to trade in large volumes, so be cautious when buying ETFs with less than 50,000 daily units “due to slippage on entry and exit orders.”
Canada’s first water fund came down the pipe in 2007. Claymore S&P Global Water ETF (TSX-CWW) tracks the S&P Global Water Index of 50 large utilities, infrastructure and equipment firms that deal with water — the greatest part in the U.S., Britain and France.
The fund had climbed over 35 per cent since the March market lows, a solid gain but not as high as the overall return on the markets.
Its U.S. sister fund, Claymore S&P Global Water Index (NYSE-CGW), also born in 2007, has had a more spectacular run. Rising almost 80 per cent since March, it has outpaced both its benchmark index and the broader market.
The first water ETF in the U.S., PowerShares Water Resources Portfolio Fund (NYSE-PHO) opened for business in 2005. With 77 per cent of its portfolio in U.S. industrial firms, it had returned close to 75 per cent since March. It has recouped more of its bear market losses than the overall market has, Mr. Roslin notes approvingly.
There are two more water-based ETFs on Wall Street. PowerShares Global Water Portfolio Fund (NYSE-PHO) tracks the Palisades Global Water Index (which gives it a more worldwide scope than PHO).
The other is First Trust ISE Water Index (NYSE-FIW). Both of these have shown strong returns since March as well, although the analyst notes that the First Trust fund is the only one of the five that trades at an average volume well below the prescribed 50,000 units per day.
Having stated both sides of the water argument for his readers in The MoneyLetter, this analyst rests his case.
The clear implication is that if investors want to get in on the next big wave in investing, they shouldn’t let too much water go under the bridge.
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