As the planet heats up, Calvert fund bets on water

NEW YORK Mon Mar 24, 2014 9:53am EDT

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NEW YORK (Reuters) - Water is the world's most abundant commodity. But for investors it tends to be a wash out.

That disconnect struck the team behind the Calvert Global Water Fund as a potential source of profits.

Global climate change, increasing demand for clean water in emerging and frontier markets, and aging pipes and pumps in the United States and Europe should help make water increasingly important in the global economy, said Matthew Sheldon, a co-portfolio manager of the $407 million fund.

"When we started looking into it, we realized that this is a trend that will be around for not just the next several years but several decades," Sheldon said.

Yet few other funds are focusing on this market, even as the World Bank estimates that global population growth will require the world's water supplies to grow by about half by 2050.

There are only five water-focused mutual funds and exchange traded funds, including the Calvert fund, according to Lipper data. When hedge funds are included, total invested assets focused solely on water amount to less than $10 billion, analysts say.

Calvert Global Water Fund, which has gained an average of 14.3 percent during each of the last three years, won a 2014 U.S. Lipper Fund Award in the global natural resources category in part because its portfolio differs from many of its peers, said Jeff Tjornehoj, the head of Lipper Americas Research.

"It has done an excellent job producing way-above-average returns with only average amounts of risk," he said.

Sheldon, who is part of the five-member management team based in Ireland, said his fund largely splits its bets between four different types of companies.

These include companies increasing the water supply through desalination or irrigation; those decreasing demand through plumbing or leak detection; companies improving water quality; and those expanding or fixing pipes and pumps.

All told, there are about 140 companies in this investment segment, Sheldon added.

The portfolio touches on every major sector of the economy except financials, and it focuses chiefly on companies based in the United States and Europe, although revenues can come from emerging markets.

Each of the 40 companies in the portfolio gets at least 10 percent of its revenues from water. The fund's largest holdings include U.K. wastewater company United Utilities Group Plc, Swiss pump manufacturer Sulzer AG, and Japanese turbine and compressor manufacturer Ebara Corp.

Despite the concentration on macro issues, only about 15 percent of the portfolio is directly connected to government policy or projects, Sheldon said.

The team sees little immediate impact from short-term weather such as the drought in California or record flooding in England, although these might nudge policy makers and businesses to take water matters more seriously.

"Investing in anticipation of government policy is very difficult because it always get delayed," Sheldon said.

Construction and industrial companies account for the largest section of the portfolio, or about 40 percent.

Lately, the fund has been focusing more on companies in the pipes and infrastructure business.

Sheldon and his team recently added to a position in HD Supply Holdings Inc, a $4.4 billion industrial distributor based in the United States. HD Supply gets about a quarter of its revenues from its expanding waterworks business, which provides water and sprinkler systems to residential and commercial construction sites, according to Thomson Reuters data. The company's shares, which debuted on the public markets in June of 2013, have slid 2.5 percent for the year to date.

The fund has also been adding to its position in Flowserve Corp, an $11.2 billion market-cap company that is one of the leading makers of pumps and pipes used in water treatment plants around the world. In December, the company announced it will provide all the pumps at a desalination plant in Chile that, when completed, is expected to be the largest such facility in the Western Hemisphere.

Investors who want to add water to portfolios will pay an annual expense fee of $1.85 per $100 invested, a level higher than average.

(This story has been refiled to corrects name of fund manager in third paragraph.)

(Reporting by David Randall. Editing by Lauren Young and Andre Grenon)

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