Blue gold: the clear and liquid investment

WARS have been fought over land, oil and diamonds but nothing is more fundamental to human existence than water. Now a combination of exponential population growth and climate change is rendering the blue gold an ever scarcer commodity.

We are consuming water like never before – the US Environmental Protection Agency says that global water consumption rose six-fold between 1900 and 1995 – more than double the rate of population growth. By 2030, the World Bank estimates that almost half of the world’s population will be living in areas of high water stress.

Consequently, global water companies are thriving as they play an important role in man’s attempt to manage water more efficiently. The downturn in the markets has also forced the water industry to become more innovative and less reliant on debt, which analysts say ought to be beneficial in terms of returns.

Water firms’ share prices are now reflecting this: new research from S&P Indices shows that the S&P Global Water Index – which contains the 50 largest listed water-based stocks – has risen 7.3 per cent over the past five years compared to a 0.2 per cent fall for the S&P 500.

Water companies also offer investors the advantage of a diversified approach: they will still be susceptible to market moves but they should be less correlated to the business cycle – water will be needed whatever the economic situation.

The research from S&P Indices highlights this lack of correlation: the S&P Global Water Index outperformed the S&P 500 by 6.2 per cent in 2009, rising 32.7 per cent. And while it has not been immune to market weakness this year, it has again performed better than the S&P 500, which is down 7.7 per cent so far.

Investors can access water companies through exchange-traded funds (ETFs) from providers such as Invesco Perpetual’s Powershares and BlackRock’s iShares. While water ETFs are far from mainstream, interest is picking up, says Ravinder Azad, listed fund sales executive at Powershares, which offers the Palisades Global Water Fund ETF with a total expense ratio of 0.75 per cent.

Unlike the S&P Global Water Index, the Palisades Global Water Index doesn’t weight its constituents by market capitalisation. Instead, it comprises six sectors – water utilities, treatment, analytical, infrastructure, resource management, and multi-business – each of which is assigned a sector weight based on relative fundamentals. This offers investors an alternative approach to water companies and does not bias the index towards the largest stocks by market capitalisation.

The commoditisation of water will continue as its scarcity grows. An investment now offers inherent diversification and may yield a steady stream of profits.