Investing in Water

We have seen a phenomenal bull market in commodities recently. Oil, gold, corn, and copper have all provided investors with great returns. But which commodity might be the best investment going forward? Would you believe water?

Domestic water demand has been on a tear for some time. Since 1900, per capita water usage in the United States has skyrocketed by over 800 percent in most regions, dwarfing overall U.S. population growth during the same period.

At the rate demand is increasing, many states will encounter significant problems in the near future. In fact, according to a recent Environmental Protection Agency report, 36 states will face severe water shortages by 2013 unless consumption is drastically reduced.

As bad as things may be domestically, the situation overseas looks even worse. Only twenty percent of the world’s population has access to running water, and over a quarter of China’s burgeoning 1.3 billion population lacks sufficient clean drinking water. But that’s just the tip of the iceberg. A recent UNESCO study estimates world water consumption will jump almost 27 percent over the next two decades, from roughly 2,182 billion cubic kilometers today to over 2,764 billion by 2025. Much of this growth will be fueled by emerging market countries that do not manage their meteoric growth within the limits of their water infrastructure.

Water is already big business. In fact, according to a recent Goldman Sachs study, the $400 billion water distribution, purification, and infrastructure sector is expected to grow by 4% to 6% per year for the foreseeable future in most developed countries, and as much as 15% per year in emerging markets. This growth obviously creates tremendous opportunities for long-term investors.

One way to play the global water boom is to invest in individual water-related companies. Unfortunately, there aren’t a lot of household names from which to choose. While conglomerates like General Electric and ITT have water divisions, those divisions are only small pieces of their overall operations. And while there are investment opportunities among smaller and mid-size companies, it’s often hard to determine which will succeed and which will fail.

For investors looking for a more diversified approach to water-related investing, there’s the PowerShares Water Resources Portfolio (PHO). This exchange-traded fund invests in a basket of 38 global water-related stocks, ranging from multinational conglomerates like GE to smaller niche players like Layne Christensen and Synagro Technologies.

While the fund has been in existence for a short time, its benchmark Palisades Water Index has an enviable track record. Over the past 3 years, the index has generated an average annual return of 15.21%. Its 5-year track record is even more impressive, coming in at over 19.26% per year—more than twice the average return of the S&P 500 Index over the same time period.

Investors interested in more exotic ways to play the water market have some options as well. Claymore Securities offers a unit investment trust that focus on the water industry, and there are also a handful of hedge funds and private equity firms devoted to investing in water and water-related companies, including AquaTerra Investment Management and Summit Global Management.

David A. Twibell, JD, is president of Private Wealth Management for Colorado Capital Bank, where he directs the bank’s portfolio management and wealth advisory practice. He can be reached at (303) 814-5545 or dtwibell@coloradocapitalbank.com.