Funds look to capitalize on water's worth - Shirley Won

Is water the new gold?

Given the growing scarcity of drinking water worldwide, more companies are launching investment vehicles to satisfy a thirst for this commodity that has been dubbed "blue gold."

In Canada, the Claymore S&P Global Water ETF began trading yesterday on the Toronto Stock Exchange. It joins the Criterion Infrastructure Water Fund, a mutual fund first offered in February.

And Toronto-based Sextant Capital Management Inc., which launched an offshore global water fund last month in the Cayman Islands, plans a similar hedge fund offering this year in Canada.

"Water funds have popped up because it is a theme that is growing significantly," said Som Seif, chief executive officer of Toronto-based Claymore Investments Inc.

Fresh water represents just over one per cent of the Earth's supply of H{-2}O. If the current rate of use continues, the United Nations has warned that two-thirds of the Earth's population will lack adequate water supplies by 2025.

While fresh water is a "limited asset," there are investment opportunities in the many companies involved in bringing this commodity to a growing global population, Mr. Seif said. "Some of the biggest pension plans and institutions around the world have been investing in water."

Canada Pension Plan Investment Board, for instance, has a one-third interest in British water utility AWG PLC.

The Claymore ETF tracks the newly created S&P Global Water Index with its 50 stocks that range from water utilities to infrastructure and equipment companies.

Names range from French-based water giants like Veolia Environnement SA [VE-N]and Suez [SZE-N]SA to Canadian-based Groupe Laperrière & Verreault Inc., which is spinning off its water treatment business.

The Claymore ETF and a global sister fund launched recently in the United States differ from two U.S. rivals that focus on American companies. They include PowerShares Water Resources, and recently launched First Trust ISE Water Index.

Ian MacPherson, president of Toronto-based Criterion Investments Ltd., said that investing in the water industry is also compelling because of the need to replace aging infrastructure in the developed world, and in developing countries like China and India.

Canadians have had fewer opportunities to invest in the water sector as domestic firms like Zenon Environmental Inc. and Trojan Technologies Inc. have been snapped up by global water giants in recent years, Mr. MacPherson said.

The appetite for such investments, he said, is reflected in the fact that his company's Criterion Infrastructure Water Fund - managed by Geneva-based Pictet Asset Management SA - has raised $45-million (CDN) in three months.

Unlike the gold or oil sectors where the volatile price of the commodity can drive a fund, "water prices throughout the world are highly regulated," Mr. MacPherson said.

"But we don't need the price of water to explode for this investment strategy to make sense," he added, noting that the fund appreciates from the growing share price of companies that make pipes or have technology to clean water.

Otto Spork, CEO of Sextant Capital Management, said his firm's recently launched offshore Sextant Global Water Fund has raised $100-million (U.S.) . in assets, but differs in that it looks for pure water plays.

That means this hedge fund - and a global water fund slated for Canada later this year - focuses on smaller companies and private equity placements, Mr. Spork said.

Fund analyst Dan Hallett of Windsor, Ont.-based Dan Hallett & Associates Inc. said there is a "lot of appeal" to the water story, but warned it's still a "specialized play" that is not suitable for many investors.

"I generally like to keep real specialized investments to under 10 per cent of the whole portfolio, or 10-to-15 per cent of the equity component [for conservative investors]," Mr. Hallett said. "You don't want to go overboard."