Why Water? The Case for Investing in Water Treatment and Infrastructure
The case for investing in water is compelling. Listen to what some of the experts say.

Water has somehow slipped below the cleantech investment world radar. Water stocks do not generally double or triple or quadruple in price in a year as some solar power stocks did last year. They are not the subject of breathless reports on how their industry is set to change the world, unlike some other areas of green technology.

Yet water infrastructure and water treatment stocks have done extremely well in recent years. A report from Summit Global Management states that in any randomly examined five-year period over the past 25 years water utilities topped the list of the best performing industry group in the US stock market, based on a total return basis.

The report also states that companies selling mainly to water utilities have a more stable business profile than similar companies selling into more cyclical industries.

Here, from some market specialists, is the case for water:

Summit Global Management state bluntly:

When compared to any other industry, water has a more obvious and compelling business model with the most persistent and predictable demand.

• There is no substitute for water and users cannot postpone purchases; price-inelastic demand.

• Conveyance and resource assets create a natural monopoly with huge barriers to entry.

• Demand is unaffected by inflation, recession, interest rates, changing preferences, or inventory loss.

• A history of strong and consistent growth under all market or economic conditions.

• Price of water does not yet reflect real economic value: Huge room/need exists for asset price expansion.

MFS of Australia manage the MFS Water Fund. They say:

Until recently, water has been considered a precious but largely limitless and naturally sustainable resource. This perception has now permanently changed. Water is now recognised as a precious but ﬁnite resource which has been mismanaged and under-valued.

This change has resulted in a fundamental shift in the way individuals, governments and business perceive one of the planet’s most vital and valuable resources. While the overall global volume of fresh water is not growing, global demand is increasing dramatically.

Simultaneously, water delivery and distribution systems are becoming dilapidated and compromised. As a result, signiﬁcant capital investment is required into all aspects of the global water sector. This major shift in the perception and valuation of water is creating investment opportunities for those businesses associated with the global water sector.

Boenning & Scattergood, who manage the Global Water Equities Portfolio, say that water is “arguably one of the most under-valued commodities on the market today”. They cite five reasons:

• Population growth and the need for new or improved water infrastructure worldwide

• A trend toward privatization and outsourcing of government water operations

• The increasingly sophisticated water needs of industry

• Regulatory trends easing the move towards privatization in both the U.S. and abroad

• The rapidly accelerating pace of consolidation in the water industry itself.

Some practical guidance from SAM Sustainable Asset Management:

To make successful investments in the water sector, investors therefore not only need to be informed about the latest technical advances and industry solutions, but must also closely follow developments and decisions on the political and legislative front. The introduction of new environmental standards, tougher demands on water quality, more public spending on infrastructure construction and maintenance as well as the fixing of tariffs and fees, will have a significant impact on the growth of individual segments of the water market and, consequently, on the attractiveness of companies doing business in these segments.

In the years to come, water will develop into a dynamic market of the future. Given the global trends that are shaping the water market, demand is unlikely to drop off in the long term. While due account needs to be taken of company valuations, investors with a long-term horizon can therefore expect to find numerous worthwhile and attractive investment opportunities.

And, to conclude, Summit Global Management again:

We have been water investors for a very long time, and we still have never seen an investment theme that comes remotely close to providing the risk-reward characteristics of the global water industry. The industry has certainly evolved over the last 25 years, and the changes are virtually all positive. The outlook for water stocks today is much better than it was 25 years ago, and we have never been as optimistic as we are today about the future of our chosen investment arena.

For some investment ideas, see Water stocks - What are the Funds Buying?

February 26th, 2008

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Why Water? The Case for Investing in Water Treatment and Infrastructure The case for investing in water is compelling. Listen to what some of the experts say.

Why Water? The Case for Investing in Water Treatment and Infrastructure
The case for investing in water is compelling. Listen to what some of the experts say.