HERE’S WHERE TO INVEST

 

 

In my previous post I illustrated how water is a safe haven, the next question is how to invest in it? Water may be the most underrated commodity in comparison with gold, oil or agricultural products but the reason why it attracts little investment is fair too. Like other commodities, one cannot buy or sell water directly or in its original form. For example, if you buy a futures contract of say sugar you would receive sugar at the end of the term on the contract. It is not possible to do the same with water.

What retail investors can look at are individual company stocks, specialised water funds and ETFs. While looking at individual stocks, of course it is essential to follow Warren Buffet’s famous advice, “Buy companies and not stocks.” However, in the case of water the overall risk of loss is already at a low as the sector as a whole is guaranteed to grow. While the total annual returns on the MSCI Global Equities Index rose over 20 per cent in 2010 compared to a decade ago, the Janney Water index, the global index for water equities, shot up more than 60 per cent in the same period.

Hence investors can consider general factors like how well managed the company is, the consistency of its profits and earnings, future investment plans and how strong the balance sheet is. Water is a quite a diverse sector so within the industry institutional investors can look at the famous soft-drink and bottled water companies, water technology companies that manufacture equipment, water recycling and sewage companies and suppliers. The colas are a money maker for sure but do not underestimate the equipment manufacturers too. The Organisation for Economic Cooperation and Development (OECD) expects investment in water infrastructure and maintenance to increase 7 per cent every year for the next twenty years. The European companies have been under pressure in the past couple of years due to the Eurozone crisis but will do well once the tide subsides.

There are a few funds focussed on water but if time is a constraint for retail investors they could rely on these professionally managed water funds better than others. These are the companies (with a general company profile) and investment opportunities in water that offer investment opportunities:

Companies

5-year stock price history of Veolia Environment and Suez Environment
Source: Bloomberg

Veolia Environment

The French giant that comprises the world’s largest water company Veolia Water along with Veolia Energy and waste-management services. The stock price and revenues of the $17bn corporation has been declining recently due to the Eurozone crisis and high oil prices globally. This hasn’t discouraged fund managers from investing in it and experts from recommending it. The financials of Veolia Water are strong even though the subsidiary is not separately listed on any stock exchange.

 Suez Environnement

The international company based in France again divides its operations 50 per cent into water and waste management each. This year, it recorded € 12bn revenues and €2.1bn EBITDA.   Net income has been declining sharply but the companies strategies seem promising enough to deliver good results after the financial turmoil in Europe and globally. The company’s CFO James Boursier says he is targeting a balanced mix of investments in European and international markets. The company is also focussing on value-added services.

Saneamento Basico do Estado de Sao Paulo 

Source: Ycharts.com

The Brazilian utility company (BRL 2500m) mainly offers environment sanitation facilities including water sanitation services. The only problem with it is that about 70 per cent of the company is owned by the government thus heavily regulated and the floated stocks are limited. But Brazil being a BRIC economy offers great growth potential in utilities.

Pentair Water

The company with $2 billion in sales provides services and products for the movement, storage, treatment and enjoyment of water. Their pumps, filters, systems and solutions are used by residential, industrial, commercial, agricultural industries and the municipalities in several regions of the world.

United Utilities

Stock price history
Source: Bloomberg

The companies revenues rose to £1.56 bn from £1.51bn in a year despite cutting its prices by 4 per cent due to policies imposed by the England and Wales government. The company along with other water players in the UK are bound to benefit from the easy and cheap loans offered by the European Investment Bank, according to Financial Times.

ETFs

PowerShares Water Resources, the $852 m largest water ETF is based on the NASDAQ OMX US Water Index. It invests at least 90% of its total assets in common stocks that comprise the Underlying Index.

ETF Securities’ Janney Global Water Fund that tracks a 60 companies’ S- Network Global Water Index. The diagram shows the mix of companies it comprises.

Source: Company website

Guggenheim S&P Global Water Index: The nearly $2bn fund is the first US listed global water ETF. It tracks the equity index S&P Global Water NR Index and maximum assets (at least 90 per cent) in American Depository Receipts (ADRs).

First Trust ISE Water Index

Source: FIW

The fund with $63m invests to correspond with an index called the ISE Water Index. Some of its top ten holdings include American Water Works Co Inc ORD,  Companhia de Saneamento Basico do Estado de Sao Pa (a stock we have recommended above),  Aqua America Inc ORD, Lindsay Corp ORD and  California Water Service Group ORD.

-Mitali

 

 

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