Water: essential for life; good for a portfolio?

It's essential for almost all plants and animals to survive. In some places on the planet it is expensive to buy – yet in other locations it can be gathered and used for free.

We are talking about water. To some people it is ethically wrong to put a dollar value on this precious element. But it is undeniable that the provision of safe water systems is a crucial and growing part of the infrastructure needs around the world. Billions of dollars are being spent on water needs – and that spending is sure to grow.

Impax Asset Management Group PLC is one of the leaders in this emerging segment of the investing world. Impax is an investment manager based in Britain that specializes in resource and environment-related areas. It has about $4-billion (U.S.) in assets under management. Simon Gottelier is the co-manager of Impax's Water Strategy fund.

"We see water as a long-term secular growth theme," Mr. Gottelier says. "There are multidecade trends we are positioning ourselves to capitalize on."

He sees four themes underlying his firm's "water hypothesis."

The first is emerging market urbanization. Hundreds of millions of people in places such as China and India are going from rural to urban communities, which places tremendous stress on existing infrastructure, and increases demand for new infrastructure.

The second theme is refurbishment of existing infrastructure, especially in developed markets. Mr. Gottelier notes countries such as the United States have been systemically underinvesting in their water systems for decades, though there are signs they have begun to rectify that.

Third is increasing government oversight of water quality. This is a factor everywhere – which we are reminded of in cases when inadequate water quality has tragic consequences.

And the fourth theme Mr. Gottelier identifies is the need for governments to adapt to changing weather patterns. Climate change is an issue, and extreme weather events are becoming more frequent and more severe. Those events often overwhelm and damage elements of the water system, such as sewers, drainage and waste-water treatment.

All of these factors require tremendous investments by governments and private companies – an estimated $500-billion (U.S.) a year, and growing. This spending provides a great number of opportunities for companies, and investors.

Scott Rickards also sees plenty of opportunity in the water field. Mr. Rickards is founder, president and chief executive officer of Waterfund LLC. The firm says its vision is to achieve universal access to freshwater by enhancing capital investment in global water infrastructure. The company is developing tools to measure the full cost of providing freshwater. Waterfund is also pioneering the first financial risk management products catering to the needs of the water industry.

'Peak water'

Mr. Rickards believes we are now experiencing a moment of "peak water," in the sense that abundant freshwater resources in many of the world's major cities have been depleted; or at least that clean, fresh water sources are less abundant. Therefore, he says, the capital need lies in the infrastructure that will source, treat, and deliver water from new sources to cities.

Mr. Gottelier sees three kinds of companies for investors to consider.

The first is companies that provide infrastructure, such as pumps, valves and pipes, as well as engineering and management expertise.

The second is water treatment, including chemicals, filtration, monitoring and treatment.

And third is utility companies, including those that have been privatized by governments.

Water-related investing has caught the attention of stock-pickers at more mainstream funds, as well. Jason Gibbs is a vice-president and portfolio manager at Dynamic mutual funds – including its Global Infrastructure Fund. He favours water utilities, saying they are stable businesses – regulated companies that provide essential services with no competition. Mr. Gibbs also sees growth for these companies because of the continued significant amount of spending required to rebuild and expand water infrastructure around the world.

Narrow focus

Both Mr. Gibbs and Mr. Rickards caution that investment funds entirely devoted to water may not be the best choice for investors.

"I would suggest it is extremely difficult to have a fund entirely dedicated to water," Mr. Gibbs says. "There just aren't enough stocks that fit the theme."

Mr. Rickards says equity funds and water equity exchange-traded funds do not generally provide good exposure to infrastructure and retail water agencies. He notes they tend to be more technology-focused, and those companies may not be able to capitalize on their breakthroughs.

"If a new membrane can radically lower the cost of desalination, great," Mr. Rickards says. "But, generally, most new technology is relatively high-cost and therefore not affordable, given the budget constraints of water utilities."

Nevertheless, all three investment managers see several attractive companies in the water sector for individuals to consider. And they agree that the essential and growing needs for water services around the world will be a continued trend for global investing in the future.