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August 04, 2008

Investing in Water: Bringing Water to the Sea
    by Anne Moore Odell

Whether you wade into investing in water or dive in head first, the water industry offers investors many opportunities. -- Water--so important for life that you don't think about it until its not there. Yet for many parts of the world, securing clean drinking water is a serious problem. Population growth and water usage are already straining current water supplies. The United Nations estimates that in the near future two-thirds of all countries will be "water stressed" with 1.8 billion people suffering from "absolute water scarcity." In developing countries, the lack of clean water and inadequate sanitation is the leading cause of child mortality, reports the UN.

SRI Mutual Funds GuideOnly around three percent of the water on earth is fresh water. However, fresh water supplies are being destroyed at an alarming rate as surface water supplies are polluted and groundwater supplies, which make up 99% of available freshwater, are mined beyond their natural rate of replenishment. Global climate change further exacerbates the supply issue as climatic changes disrupt weather patterns causing drought and desertification.

The questions poised by the growing demands for water is one that local municipalities, states, and national governments are going to have to answer. As one of the necessities of life, no one should be denied water. In 2000, the UN adopted the Millennium Development Goals, a collection of poverty alleviation benchmarks, which estimates that by 2015 $24 billion needs to be spent on drinking water systems and $142 billion on sanitation technologies globally. Reports released in 2007 by the US Environmental Protection Agency, the Government Accountability Office, and the Water Infrastructure Network show a shortfall of between $300 billion and $500 billion between funding and need over the next 20 years.

For socially responsible and green investors, investing in water can support a double bottom line of earning returns while supporting the environment and communities. A number of indices, accompanying ETFs, and mutual funds follow global water companies. These include the Claymore S&P Global Water Index ETF, Dow Jones US Water Index, ISE-B&S Water Index, Janney Global Water Index, New Kinetics Water Infrastructure Fund, Praetor Global Water Fund, Powershares Water Resources ETF, Palisades Water Index, and S&P Water Index.

"Water is the ultimate 'green' investment," said William S. Brennan, President & Managing Partner for Aqua Terra Asset Management and Portfolio Manager of the Kinetics Water Infrastructure Fund. "As the most essential life-sustaining substance and the most critical input to economies around the globe, water is the only commodity that has absolutely no substitute at any price."

Aqua Terra Asset Management is a registered investment advisor that specializes in investing in global securities of water and water-related businesses. Established in 2006, the firm has a deep domain expertise in the global water industry and focuses on capital appreciation while employing an emphasis on preservation and risk management to limit portfolio exposure to market downturns and volatility.

The demand for water is leading some to compare water to oil. Yet the comparison between oil and water only can be stretched so far. Life needs water to live; life doesn't need oil to survive.

Christian W. Magoon, President and Senior Managing Director of Claymore Securities, told, "Water is the only commodity for which there is no replacement. Can we replace oil? Yes. Oil we can replace. Same with lumber or soybeans. There is only so much water on earth, but the demand for water itself is not affected by inflation or tax rates," Magoon said.

"Water is not the new oil yet because oil is priced as a commodity while water still experiences inefficient pricing relative to the cost of treatment and transporting it to the point if use," Aqua Terra's Brennan said.

Brennan continued, "but when one looks at the appreciation of water rights from $2000 an acre to $30,000 an acre in the last 36 months, the price of water in various situations is surging. The cost of a gallon of bottled water vs. the price of a gallon of oil is still 50% higher when put in the terms of what consumers pay for a 16oz bottle water product from Pepsi or Coca Cola."

Water companies span a wide range of sectors and industries including infrastructure, utility, clean water production, efficiency, filtration, purification, monitoring, waste water treatment and pollution control. Sectors that can have a significant impact on water include chemical, steel, manufacturing, and agriculture.

The Claymore S&P Global Water Index ETF has a global investment theme, giving investors assess to 65 different stocks in pure play water companies across ten countries. The ETF reflects the index's diversification between companies that focus on the material side of water production and companies that focus on the utilities and infrastructure side.

Top fund holdings as of the end of August 2008 in the Claymore S&P Global Water Index ETF include Veolia Environnement (7.59 %), ITT Industries inc (6.67 %), Geberit (6.53 %), Danaher Corp. (6.38 %), Kurita Water Industries (6.08 %), Nalco Holding (5.49 %), United Utilities Group (5.31 %), and Itron (4.68 %).

While new technologies around water are being actively explored, Brennan cautions more than a good idea is needed for investors to make money: "While focusing on technologies, one must consider management's ability to commercialize it, open doors to customers, and the right strategies to convince the end user to adopt and scale a new technology. This requires a very specific, experienced management team.

Aqua Terra's team is looking at desalination, smart meters, nanotechnology, improved membranes and filters, and pipe rehabilitation in the form of "trenchless" replacement and "gray" pipes as new areas of growth in water technologies.

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