SmartInvesting.ca

List of Articles

‘Water stress’ brings great returns for investors

by Wayne Cheveldayoff, 2006-10-19

When water flows from your kitchen tap, what do you see? It should be dollar signs.

Investors have enjoyed a boom in water stocks that shows no signs of ending.

The Bloomberg World Water Index of 12 water utilities has gained about 84 per cent in the past two years, significantly out-pacing oil futures, which were up just 26 per cent in that time.

Investors who have not yet diversified their portfolios into this essential-for-life sector may want to take a cue from the Canada Pension Plan Investment Board’s recent move as part of a group of investors to pay close to $5 billion for AWG Plc, the water supplier for 6 million customers in eastern England.

The board obviously believes that there is money to be made in water and since Canadian water utilities are government owned, it has had to look elsewhere to capture future investment returns.

A recent UBS Investment Research report by analyst Shirley Knott highlights the problems that the world is having in sustaining sufficient drinkable water.

“Water stress is increasingly affecting developed as well as emerging economies. This is likely to increase with population growth, urbanization and the impacts of climate change,” the report says, quoting United Nations, World Health Organization and other non-governmental agencies that have extensively studied the matter.

“It is evident that, although problems are still most acute in the world’s poorest countries, many areas of the developed world, particularly parts of the U.S., Australia and southern Europe, are already facing water challenges. Additionally, areas such as India, China and parts of Latin America, considered so integral to global economic growth, already appear to be under ‘high stress’.”

Governments around the world will have to spend hundreds of billions of dollars in the coming years to improve water systems and many companies are positioning to benefit.

The profit potential from investing in water utilities and equipment companies may have slipped under the radar screen with many Canadian investors because there are few investment opportunities in Canada. Also, none of the Canadian fund companies offers an equity mutual fund concentrating on water stocks.

One of the original water funds is the European-managed Pictet Water Fund (www.pictetfunds.com), which is up 25 per cent in the past year, compared with 15 per cent for the MSCI World Index. Unfortunately, it is not easily accessible to Canadian investors.

One fund that is accessible to Canadians, including for their RRSPs, is the PowerShares Water Resources Portfolio (www.powershares.com), an exchange traded fund (ETF) listed under the symbol PHO on the American Stock Exchange. With a low management expense ratio of about 0.6 per cent, this ETF is based on the Palisades Water Index and contains dozens of companies that focus on the provision of potable water, treatment of water, and the technology and services that are directly related to water consumption.

The PowerShares Water Resources Portfolio is up about 17 per cent since inception in December 2005.

The main holdings of both funds are a good source of ideas for Canadian investors seeking to invest directly in the companies that are making the most waves in this sector. For example, the PowerShares fund contains a number of smaller companies but also General Electric, which is actively focused on the water sector. GE recently purchased Zenon Environmental, a Canadian water treatment company.

The UBS report lists a number of stocks followed by the firm’s analysts. Among those in the infrastructure group are U.S. firms American States Water Company, which provides various water services at U.S. military installations, and Aqua America, a diversified water utility that UBS believes has significant growth potential.

The list also includes the IAM water utility in Chile (“with a 7-8 per cent dividend yield”), the Philippines-based Manila Water Company, and four British water utilities (Northumbrian Water Group, Pennon Group, Severn Trent and AWG Plc).

Among others cited are: (1) Pall Corp, a U.S. firm manufacturing filtration and separation products (in alliance with GE); (2) Toyobo, a Japanese manufacturer of fibre membranes used in sea water desalination plants especially in the Middle East; (3) Geberit, a German leader in sanitary systems and piping; (4) Rotork, a British pumps and valves producer; and (5) Thermo Electron, a U.S. provider of meter, measurement and control systems.

Wayne Cheveldayoff is a former investment advisor and professional financial planner. He is currently specializing in financial communications and investor relations at Wertheim + Co. in Toronto. His columns are archived at www.smartinvesting.ca and he can be contacted at wcheveldayoff@yahoo.ca.


The URL for this page is http://www.smartinvesting.ca/articles/20061019010100.html .


©2006 Wayne Cheveldayoff