Water: A Rising Tide of Smart Investing Plays

As water prices climb globally, companies are developing ways to conserve, clean, and meter consumption. Here are some promising contenders

By David Bogoslaw

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With the yearly Earth Day celebration stretching into its fifth decade, water seems to have risen in the public consciousness as one of the planet's chief environmental concerns. There is growing recognition that this resource—which has no substitute—may turn out to be the hot commodity of the 21st century, much as oil has been for much of the past century.

The higher value ascribed to water has less to do with depletion and scarcity than cost. While there's as much water on the planet as there has ever been, cheap water is in short supply. "All the easily tapped sources have already been tapped," by damming up rivers and other methods, says Neil Berlant, lead manager of the PFW Water Fund (PFWAX), the only open-end mutual fund focused exclusively on water-related stocks. What remains are more expensive sources of water—from oceans, groundwater, or reclaimed used water—which require either desalination, chemical disinfectants, or other processes to be made suitable for drinking.

There's plenty of technology available to clean up water to meet increasingly strict public safety standards, but consumers will have to get use to paying higher rates to local water systems to pay for the necessary treatment. People in the developing world have long had little access to clean drinking water because of how much it costs.

privatization wave is coming to water

Berlant predicts that water prices across the U.S. will double or triple over the next few years—though that's not as scary as it sounds because the increase will come off a fairly low base. He expects the higher cost to unleash a wave of business opportunities as people shop for products and services to improve water quality. This is compounded by the need for water of much higher purity than in the past for such sensitive manufacturing processes as the production of semiconductors, whose optimal performance depends on cleaner chips, he says.

Another trend in water is the move around the world toward privatization of local water systems as the costs of repairing infrastructure and providing clean water exceed what most municipalities can bear. Of nearly 60,000 local water systems in the U.S., the great majority serve fewer than 3,000 people and only 15% are owned by investors. Foreign-based companies such as Suez Environnement and Veolia Environnement have been expanding beyond their home territories to buy up public water companies in the U.S. and across the developing world.

The extended downturn in the U.S. housing market, by causing the tax base for many parts of the country to shrink, is likely speeding up the privatization process, says Judd Hill, a managing partner at Washington-based Summit Global Management, who focuses on new investment ideas in the water industry.

The thought of investing in privatized water utilities is sure to stir some uneasiness, if not revolt, among socially responsible investors who look not only at returns on their invested capital but also at the impact of management practices on a company's employees and customers. There has been a backlash against privatization in such places as Uruguay, where the local populace ousted a Suez subsidiary for not doing the work that had been contracted and for denying service to those who couldn't afford connections. The push to make access to water a human right is likely to intensify now that Canadian water activist Maude Barlow has been appointed the United Nations' first advisor on water.

seeking pure-play water companies

Still, there's growing recognition of the need for further market-oriented solutions, since people lack sufficient motivation to use water more efficiently unless they're paying more for it.

The water industry is undergoing a transition that will result in a more clearly defined structure enabling the emergence of pure-play companies dedicated to resolving water challenges, says Steve Hoffmann, an analyst for the Palisades Water Indexes and author of a new book, Planet Water: Investing in the World's Most Valuable Resource. Until then, investors have to decide whether or not big conglomerates have enough exposure to water, amid all their other businesses, to justify investing in them, he says. Despite their accumulation of water treatment expertise in recent years, Hoffmann excludes General Electric (GE), Dow Chemical (DOW) and similar companies from the Palisades indexes he helped to build because their exposure to water is too small a part of overall operations.

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