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Water fund seeks to quench investor thirst

MUTUAL FUNDS REPORTER

If Criterion Investments Ltd. has its way, a new water equity fund will tap into a reservoir of investor enthusiasm.

The Toronto fund company today will launch the Criterion Water Infrastructure Fund, the first equity fund in Canada that invests across many sectors in the global water industry. The fund is the Canadian version of the Pictet Global Water Fund, an equity fund overseen by Pictet Asset Management SA of Switzerland.

"Everyone is quite environmentally conscious at this time. And until now, there has been no compelling, coherent investment strategy," said Ian McPherson, president of Criterion, a unit of Toronto labour-sponsored fund firm VenGrowth Asset Management Inc. "There are different dynamics right now that make water an interesting income proposition plus a good growth prospect story."

Fresh water is a scarce resource. More than 98 per cent of the Earth's water is saltwater and most of the rest is locked in polar ice caps. The United Nations estimates that by 2050, more than two billion people in 48 countries will be short of water.

"Water stress will be one of the major political and economic issues over the next few years, increasingly for developed, as well as emerging, economies," said a Jan. 30 global equity report from brokerage UBS AG.

Over the next five years, $1-trillion must be spent building water infrastructure in the developing world and refurbishing water facilities in North America and Europe, Vengrowth estimates.

"If there's that much spending in the water chain, people are going to make money," Mr. McPherson said.

Business is answering the call with a growing list of firms developing water treatment, infrastructure and supply, including food giant Nestlé SA, French services company Veolia Environnement and engineering firm ITT Corp., all stocks in the Pictet fund. Water supply and treatment firms make up about 38 per cent of holdings. Water technology firms comprise about 32 per cent of the fund, followed by environmental services (17 per cent) and mineral water (9 per cent). The fund has a 3-per-cent weighting in cash. Its management expense ratio is 2.65 per cent.

Mr. McPherson predicts the water fund's blue-chip, conservative focus will resonate with investors, along with its international scope and income potential. The fund has a target yield of 5 per cent a year.

Criterion is clearly hoping to emulate the success of Pictet in Europe, where the water fund has grown rapidly to about $5.2-billion in assets under management since its launch in 2000. Urbanization, industrialization and outsourcing are driving the need for water, themes that have struck a chord with retail investors, said Philipe Rohner, a Pictet senior fund manager based in Geneva.

"The risk-return profile of companies that are active in this industry gives the retail investor something they can live with," Mr. Rohner said.

The equity selection process starts with a list of 800 companies with operations tied to water. Analysis of each firm's business model and how it relates to water cuts the list to about 200. Liquidity, earnings momentum and other factors trim the list further. As of Jan. 31, the Swiss fund held 77 stocks and has an annualized return of 6.8 per cent since inception, compared with an annualized loss of 1.3 per cent during the same period for the MSCI World Index, a global equity index.

There are some skeptics.

Peter Gleick, president of the Pacific Institute, a water research group in Oakland, Calif., agrees that "billions of dollars" must be spent to meet the world's irrigation and water needs. But he fears that market speculation and consolidation have driven the sector's recent stock gains, and future capital costs may post slender rates of return.

"It's not clear to me that if I had a dollar to invest, the best place to invest is the water sector," Mr. Gleick said, a scientist who does not invest in the sector for ethical reasons. "I don't know how well these funds are likely to do."

© 2007 The Globe and Mail. All rights reserved.

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