| Will water be the oil of tomorrow? |
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| 02/04/2006 | |
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With the water issue making the headlines of so many newspapers as the Water Summit took place in Mexico in March, one could have hardly ignored the extent to which the most precious liquid on earth is becoming scarce. But long before this summit, the trend hadn't gone unnoticed by executives at Pictet Asset Management, who from their home base in Geneva – next to packaged water giant Nestlé and close to Lyon, home of the world's first water concession in 1853 – decided to launch in 2000 the Water Fund, the world's first fund completely invested in water-related equities. "That was just when high-tech stocks were falling out of favour, and we had to look for new ideas", remembers Hans Peter Portner, who manages the Water Fund. A look at the situation in California was enough to convince them that water was one of those new ideas. "There, the price of water has gone up 6% per annum over the last 20 year", says Mr. Portner. "That's exactly in line with the oil price, only with less volatility." So, even if there hasn't been a direct bull market in water, which remains unlisted as a commodity, companies working in the sector have benefited and are set to continue benefiting from the resource's increased scarcity. With prices going up, investments will start making financial sense. "In many parts of the world, water is getting closer to its full cost recovery", says Mr. Portner, who expects investments in water infrastructures and equipment to grow. "For now, the sector remains largely under-invested and its infrastructure in bad shape." As pointed out during the Water Summit, a double phenomenon is now profoundly modifying water as an investment theme throughout the world. Governments are more numerous than ever in privatising their water infrastructures, which is providing a serious boost to industrial groups such as France-based Suez and Veolia Environnement. From a sector that used to depend largely on the state, it is now moving toward a mix of private and public players. According to the World Bank, outsourcing and privatisation in the water sector are set to double and reach 36% of the market by the end of the decade. But the water boom won't be limited only to developed markets. Huge demographic pressures are already being felt due to the rapid urban and industrial developments of countries such as China and India. According to the World Health Organization, 35% of the world population will live in areas with water problems by 2025. At this rate, opportunities for companies specialising in water treatment and distribution will be plenty. Despite these projections, theme funds on water still remain relatively few. There are currently only four actively managed funds in Europe, all domiciled in Luxembourg. The best-known and largest is Pictet's Water Fund, which invests at least two-thirds of its assets in international equities related to the water sector. Its assets currently amount to €1 billion. Another fund, the €346 million SAM Sustainable Water Fund, invests all its assets into companies that are active in the water sector. Two-third of its assets are said to be compliant with sustainable development. Among the smaller players, US-based Boenning & Scattergood manages the Praetor Water Equity Fund, which is entirely invested in water-related companies in the US and Europe. Finally, KBC, the Belgian fund manager, manages the "Eco Water Fund". At this time, the main alternatives to funds are structured products such as investment certificates that track a sectorial index. Surfing the wave of popularity in water equities, French bank Société Générale just launched a certificate which replicates the performance of the World Water index (WOWAX), made up of companies whose earnings rely mainly on water. ABN AMRO, the Dutch bank, has a similar product, the ABN AMRO Water Certificaat. Opportunities to structured products based on water are increasing with new water-based indices. Those indices included the WOWAX, launched in February 2006, as well as the International Securities Exchange (ISE) – B&S Water launched in January. If water equities keep on posting excellent performances, the buzz surrounding water as an investment theme will not to fade away anytime soon: since the end of December 2003, the index has posted a 100% return, against 35.9% for the DJ Global 1800. World Water Performance  Sources : Reuters, Dow Jones Indexes - data at 20/03/06, Société Générale. Julien Laplante |
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