Watering Down Risk – Water Investments to Add Variety to Portfolios

Water is central to survival and has been an important factor in various past conflicts, ranging from Islamic State’s attacks on Syria’s Tabqa dam to indiscriminate shelling in Ukraine which left 3 million people without access to clean water. In recent decades, water’s supply and demand imbalance has come under increasing pressure as population growth is complemented by the additional drivers of climate variability and economic expansion. Consequently, the idea of water becoming a profitable commodity investment is increasingly possible – Goldman Sachs refers to water as ‘the petroleum of the future’. Due to water being publicly regulated, it is not a traded asset, such as oil or gold, which ultimately makes investing in the commodity more complex. However, a range of innovative methods have aimed to take advantage of this potentially lucrative, future market.

 

Newly emerging water-based exchange-traded funds (ETFs), such as Guggenheim’s S&P Global Water Index ETF, offer a way to invest in water. A typical water ETF will invest in water companies and related utilities involved in pipelines, sewer construction, or water purification. With less than 10 water ETFs listed on the NYSE and the NASDAQ (totalling 1.9 billion USD in assets under management), they are a relatively niche investment area. At present, water ETFs are predominately seen as an opportunity to diversify an investment portfolio and reduce the risk profile.

 

Alternate ways to invest in water include purchasing water rights. These allow investors to access water sources and charge governments or companies to use them – usually at a mark-up to generate profits. For example, Aqua Capital Management, a water rights and investment management company, identifies water-scarce regions (including areas in the US and Australia) and purchases the rights of use. They currently manage the largest portfolio of water rights in the United States and have executed more than 500 water rights transactions.

 

Dr Micheal Burry, a Scion Capital hedge fund manager (widely known for his success in predicting the 2008 housing bubble), is focused on investing in farmland as a proxy for water-based investing. With the impracticalities of water-based investing, specifically in regards to transportation and politics, he focuses on investing in almond farms in water-rich areas. ‘What became clear to me is that food is the way to invest in water’, says Burry. Growing a pound of almonds requires 1,900 gallons of water. Hence, as water becomes scarcer, the number of almond farms will decline (as water-scarce farms struggle to grow crops), resulting in the remaining farms increasing their prices and profiting from this. By shipping the almonds globally to water-scarce areas, there is potential for further profits.

 

A final way to invest in water is through directly investing in water stocks – such as the American Water Works Company, which sells water to public utilities. Companies focusing on purifying water for drinking, such as York Water, are also forecasting high growth rates. York Water’s estimated earnings per share annual growth rate is an attractive 10.81%; stocks that are exposed to water and well-equipped to deal with future demand increases may be profitable long-term investment opportunities.

 

The ethics of investing in a commodity recognised by the United Nations as a fundamental human right may be perceived as questionable by some. Despite this, profit incentives remain a strong driver of investing behaviour; accordingly, a variety of methods to invest in water already exist. With just 2.5% of the earth’s water being suitable for human consumption, as stated by National Geographic, and a range of pressures exacerbating water scarcity, no clear solution is in sight. Innovative companies specialising in water technologies, specifically in desalination plants and related delivery systems, may stand to benefit significantly in the coming years. As stated by the World Health Organisation, it is estimated that every 1 USD invested in water and sanitation will have an economic return of 4.30 USD. Consequently, as global warming continues to affect our planet and water scarcity increases, more resources are going to need to be allocated to water supplies. Those that invest now may profit substantially.

 

By Esther Campbell

Senior Editor: James Float

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