Monday, February 13, 2012

Is Water the New Gold? Part 4

Investing in water

For investors, the good news is that there is money to be made here. Scarcity creates value where there was none before. Speculators have already descended. T. Boone Pickens, a Texas oilman pushing natural gas as an alternative automotive fuel, has secured water rights to a large tract of the Ogallala and wants to sell the water to the highest bidder.

The need for more investment has many turning to the private sector and the profit motive. That carries risks. Things went very wrong in Bolivia back in 2000 during the Cochabamba Water Wars. After the system was privatized, rates jumped, and the poor could no longer afford life's most basic necessity. Riots and deaths followed, forcing the president to declare a "state of siege."

Whether water is provided by government entities or private enterprise, a few truths are evident. Water will become more expensive, because the resource isn't "free" and is getting less cheap over time. And money will have to be spent on new desalination plants, recycling facilities and on efficiency efforts. Companies that make the technology and equipment needed to filter, disinfect and test water supplies are likely to benefit.

As a result, Citigroup expects the $450 billion global water industry to grow at a steady 5% annual rate in the years to come. While this may seem modest, the growth is noncyclical (which means that it should grow regardless of the business cycle) yet nondefensive (it should accelerate as emerging-market economies develop). In the volatile economic environment we've had lately, these are valuable characteristics.

The Citi Global Water Index, which includes stocks like private utility Aqua America, pump maker Pentair , and filtration outfit Pall , is up 126% over the past 10 years versus a 24% increase for the Standard & Poor's 500 Index . The five-year performance of 25% also beats the S&P 500's 16% rise. Pall and Pentair are the two most-attractive individual stocks in the sector, as they maintain clean uptrends out of the March 2009 bear market low. Pall looks particularly attractive at current levels as it emerges from a six-month consolidation pattern.

For those looking at broad exposure to the sector, there are a number of water sector mutual funds and ETFs. Funds include the Calvert Global Water, the Allianz RCM Global Water and the Kinetics Water Infrastructure . The most liquid ETF is the PowerShares Water Resources.

One nice thing about water is that, unlike gold, it isn't subject to the whims of popularity or the deftness of central bankers. It's essential for life. It's a constrained, mismanaged resource that's improperly priced. It's denser than oil and difficult to transport. And they sure aren't making any more of it.

Author:  Anthony Mirhaydari of MSN Money