* Turbulent markets drive investor interest in water
* Water returns in emerging economies as high as 20 pct
* Pension funds, wealth funds snap up UK water deals
By Martin de Sa'Pinto and Raji Menon
Oct 10 Water has yet to live up to its hype as
the commodity bet of the future, but the world's most basic
resource is drawing ever more money as asset managers seek
steady inflation-protected returns.
Investment opportunities are increasing as cities in faster
growing markets expand and as governments in more developed
countries, short of cash, are forced to turn to the private
sector to fund upgrades to meet tougher environmental standards.
Meanwhile, investors such as pension funds want alternatives
to rock-bottom bond yields and volatile equity markets.
"There are opportunities in the water space that haven't
been seen for decades now that governments have run out of
money," said Zurich-based investor Martin Kloeck, whose Signina
Capital recently launched a water fund.
The global business, including drinking and waste water, is
thought to be worth about $450 billion a year and is growing at
up to 6 percent annually, according to Citigroup.
The assets of funds focused on water and specialist water
funds nearly doubled from just over $12 billion in 2010 to
nearly $24 billion in 2011, according to data from Lipper, a
Thomson Reuters service. That could reach $50 billion by 2015,
industry analysts believe.
Growing urban populations and a lack of government money to
upgrade infrastructure are increasing the need for private
sector investment, said Hans-Peter Portner, who runs Swiss bank
Pictet's $2.9 billion water fund, the world's largest.
"These drivers are solid as rock," he said.
Private sector investment is likely to account for 30
percent of investment in drinking water and waste water by 2016
compared to 19 percent now, according to the independent Global
Water Fund consultancy.
Long term predictions have yet to be borne out that climate
change and swelling cities could mean water takes off as a
commodity investment to rival oil, but investing in such a basic
need has an appeal at a time of global uncertainty.
Morningstar data show the top water-focused funds have
returned over 10 percent year-to-date against 6.4 percent for
the MSCI World Index. The iShares global water Exchange Traded
Fund has returned 17.6 percent.
Many funds invest in water-related stocks, such as treament
companies, meter makers and utilities.
"Despite a compelling long term growth case, global water
companies trade at discounts on earnings and cash flow and
provide a better dividend yield than the broad equity market,"
said Patrick Armstrong, chief investment officer at Armstrong
Two of the world's largest water companies, Veolia
Environnement and Suez Environnement Co.,
offer dividend yields of 8.4 percent and 7.7 percent
Debt financing and more complex deals are also options.
Kloeck's Signina Capital, which recently launched a $450
million fund, this year closed a deal involving the City of
Ottawa in a contract that pays an annual eight percent.
"There are plenty of deals that we consider sweet spots,"
said Kloeck, eyeing those in the $20-$100 million range.
Even bigger returns - and growth rates of up to 20 percent a
year - could come from some emerging market sectors, such as
Chinese water companies and those dealing with desalination,
said Ian Simm of environment-focused Impax Asset Management. It
hopes to double the 220 million pounds ($357 million) of water
assets it has under management within four years.
LIQUIDITY AMONG CONCERNS
Not everyone is as bullish.
Schroders invests in water companies through its climate
change fund, but has no dedicated water fund.
"There are few large stocks like utility companies and then
a long tail of specialist smaller companies," said Richard
Strathers, an equity analyst at Schroders. "The liquidity issue
would also be a concern."
Politics is another worry for long term investments in a
sector which carries risks of expropriation and where it can be
hard to pass on price increases for such an essential service.
"We expect more growth in waste water as this market segment
is less politically charged and offers higher margins," Pictet's
Britain's water companies offer exactly the sort of
stability and clear regulation that investors are seeking and
the number of deals shows the growing appetite for the sector.
China Investment Corporation and the BT Pension Scheme both
picked up stakes in Thames Water this year, while Canadian
pension funds CDPQ and CPPIB have acquired stakes in South East
Water and Anglian Water respectively. Fund manager M&G and
Morgan Stanley bought a 90 percent stake in French water firm
Veolia's British business.
Another advantage of water was that its performance was not
linked as closely to overall economic growth as other
infrastructure investments, noted Tony Rocker, partner at
consultancy KPMG's infrastructure unit.
"During the financial crisis of 2006-2009, it was the GDP
linked infrastructure assets that didn't perform as well as
expected," he said. "Water did exactly what it said on the tin."