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Water heats up for investors

Rules prompt CPP to go overseas to get into booming sector

The world may be awash in water, but the prospect of a scarcity of useable supplies has already made it a hotter investment than oil.

Canada has one of the world's largest supplies of fresh water. But because control remains in the public domain, there are few ways for Canadians to directly invest in the resource.

Instead, funds such as the Canada Pension Plan Investment Board, which this month launched a bid for a British water utility, are looking outside the country's borders.

It's a looming issue. By 2025, about two-thirds of the world's population will face water shortages, according to the United Nations. Only 1 per cent of the world's water is available for human consumption, an amount seen shrinking further because of urbanization, population growth, climate change and contamination of water sources, a 40-page UBS Investment Research report noted this week.

In Europe, meantime, the water business is booming -- and so are investments. The world's first water fund, launched by Geneva-based Pictet Asset Management in 2000, has risen 40 per cent since its start, compared with the MSCI World index's 27-per-cent gain.

Water "is very promising for the future because of this need for investment in the coming years," said Louis-Mathieu Perrin, one of the portfolio managers who runs Pictet's $3.1-billion (Canadian) fund. He expects the sector to grow about 8 per cent a year in the long term.

Pictet estimates about $70-billion (U.S.) a year is needed worldwide to fund basic water services. In the United States alone, it pegs the investment need at $1-trillion over the next 20 years.

Mr. Perrin's fund, which isn't available in Canada, invests in water treatment companies, along with distributors, technology firms and bottled-water companies.

In Canada there are few, if any, water funds. That's not to say investors aren't interested.

"It's a great area," said Stephen Gauthier, a partner at investment firm Gauthier & Cie. in Montreal. "Here in North America, we have water for free so we have . . . constraints. But I think it's coming."

Tom Bell, who's run the Water Investment Newsletter over the past two decades, says he's seen interest in the sector explode in the past few years. "Water utilities will continue to be strong because it's a captive market -- you have to have it," said Mr. Bell, who's based in Halstead, Kan. In the United States, most of the water infrastructure is more than 100 years old and will require massive reinvestment, he added.

PowerShares Water Resources, a U.S. fund, has risen 12 per cent this year, double the pace of the S&P 500. And U.S. companies such as General Electric Co. and Dow Chemical Co. have recently made big forays into water. In March, GE bought the Canadian company Zenon Environmental Inc., a water treatment firm.

Water isn't a commodity like oil because water prices tend to be decided locally, rather than on a global market. And unlike oil, water is also not exported en masse to other countries -- yet.

Nonetheless, comparisons with oil returns are tempting. Over the past 16 years, water and oil prices have appreciated by the same amount, according to Pictet. However, in the last two years, the Bloomberg world water index, which comprises 12 utilities, has gained about 85 per cent, outstripping the 23-per-cent increase in oil futures in New York.

Much of the recent gains have been in Europe, where bidding wars for water utilities are leading some analysts to call the sector overvalued. That's not deterring investors such as the CPP Investment Board. This week, a consortium it is part of boosted an offer for AWG PLC to $4.7-billion (Canadian).

Privatization is a growing -- but controversial -- theme. The move to invest in privatized water, however, has been criticized by many citizens' groups. "We see water as a basic human right, and so it shouldn't be privatized or delivered on a for-profit basis," said Brent Patterson, director of the Council of Canadians. He said private British water utilities are among the worst polluters in the country.

By the numbers

1%

The amount of total water resources on Earth available for human use. While 70 per cent of the world's surface is covered by water, 97.5 per cent of that is salt water.

Sixfold

The amount that water use increased in the 20th century -- more than twice the rate of population growth.

$1-trillion (U.S.)

Amount needed to invest in water infrastructure in the U.S. over the next two decades.

© 2007 The Globe and Mail. All rights reserved.

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