Investors are starting to pay more attention to water shortages and how to turn them into long-term investments.
Water-related exchange-traded funds attracted more money in the nine months through September than in any full year since 2007, data compiled by Bloomberg show. These funds have continued to add cash this month, with products run by Invesco Ltd. and First Trust Advisors leading inflows.
A world ridden by water crises may not be imminent, but it looks to be getting closer. The United Nations estimates that 2.1 billion people around the world lack access to safely managed drinking water. Meanwhile, the S&P Global Water Index, a basket of 50 water-related businesses around the world, has risen 24% this year to record levels, outperforming the 20% rise in the S&P 500.
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“Companies that improve water efficiency in power plants can maximize energy yields given existing water availability near such plants,” William Page, senior portfolio manager of the Essex Environmental Opportunities Fund, wrote in an investor note last quarter. “Likewise, water technologies for industrial processes, buildings, and infrastructure can also improve the economy’s energy efficiency.”
Mr. Page’s mutual fund has about 40 holdings across nine environmental technology themes, with assets valued at about $10.2 million on Oct. 21, data compiled by Bloomberg show.
Money flowing
Investors are increasingly moving into clean technology, according to Mr. Page. In the ETF market, the First Trust Water ETF took in nearly $34 million in September, the most since November 2016. The Invesco S&P Global Water Index ETF had a $42 million inflow earlier this month, while the Invesco Water Resources ETF has absorbed almost $26 million over the last four months.
Unlike most thematic ETFs, which track more urgent trends, buying a water fund is a long-term play that’s potentially “many, many years” away, according to Bloomberg Intelligence analyst Eric Balchunas.
“People for too long, all over the world, have taken water for granted, and that is no longer able to be the case,” said Matthew Diserio, president and co-founder of Water Asset Management, a global money manager that invests in water companies and assets. “Scarce, clean water is the resource that is defining this century, much like cheap, plentiful oil and gas defined the last century.”
Change afoot?
The water industry is one of the most traditionally underinvested sectors, and few investors focus on water with the depth of understanding that exists with many other industries, Mr. Diserio said. But that has started to change.
“Everyone knows water is life. But a primary focus on topics of climate change, without emphasizing what can and must be done to limit the impact on water supply and quality, is like trying to get people to stop smoking without trying to cure cancer,” he wrote in a report for the International Desalination Association this summer.
Now, as more money is invested in water quality and supply, “virtually all the stocks that make up our portfolio are experiencing a positive fundamental tailwind of earnings growth,” Mr. Diserio said, highlighting companies he owns including France’s Suez, Forterra Inc. of Irving, Texas, Manila Water Co. in the Philippines, and Milwaukee’s AO Smith Corp.
“The companies that make up the water industry are the single best businesses for multigenerational capital preservation and wealth transfer of any industry,” he said.
Investing in water has historically revolved around utilities and dividend yields, but the water technology sector is “high impact” compared to utilities, according to Essex’s Mr. Page. His fund invests in clean-water technology covering management, treatment and distribution.
Mr. Page’s mutual fund holds stock in Watts Water Technologies Inc. of North Andover, Mass., Milwaukee’s Badger Meter Inc. and Lindsay Corp. of Omaha, Neb., because he thinks these companies can increase their earnings in challenging revenue environments.
Companies like Australia’s Fluence Corp., Xylem Inc. of Rye Brook, N.Y. and Energy Recovery Inc. in San Leandro, Calif., are also well-positioned to grow revenue and earnings by providing equipment that can process and treat water, he said. Fluence is “easily scalable to the emerging markets, where it has had recent wins in the Middle East and Ivory Coast,” Mr. Page said.
The Essex Environmental Opportunities Fund owned these companies as of Aug. 31, regulatory filings show.
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