Water is not currently a tradable commodity like oil or gold. The closest investors can get to it is by investing in utility companies. Alternatively, people can invest in water-related stocks like purification, irrigation and water transportation companies.
Trading water as a commodity is difficult because it is a fluid substance. Although governments usually retain control of water resources by issuing licenses, ultimate ownership is a grey area. For example, a river can flow through several countries, which raises questions about proprietorship. This prevents water being easily packaged and traded like other commodities.
For countries where water is in short supply, uncertainty over ownership could also cause political problems, notes Robert Marshall-Lee, director of investments at Newton.
"On large rivers that cross a number of jurisdictions or countries there are usually agreements in place to share the benefits of that water system in an egalitarian manner. But this could also be the cause of strife or civil unrest if water availability declines."
Jim Wood-Smith, head of research at Williams de Broe, which is soon to launch a Pan-European fund of water funds, agrees.
"Nobody really understands the ownership of water and it is likely we are going to see some quite serious disputes. For us, the investment opportunities are not with actual ownership but with purification and infrastructure."
Water needs to be regulated to prevent supplies being depleted. As Wood-Smith points out, despite the earth comprising two-thirds water, only 3% of this is fresh water.
"What we have is a shortage of the right type of water," he says.
Illustrating the commodities performance advantage
Marshall-Lee says regulation is essential if water is to become a sustainable resource rather than one that is mined now at the expense of future generations. Water is often under priced and overused in water-intensive sectors like agriculture, where for historical reasons farmers can pay little or no money for licenses. This will need to change to prevent supplies being depleted.
He points to the Aral Sea disaster in Central Asia, where unmonitored irrigation caused the world’s fourth largest expanse of fresh water to dry up, as evidence of what can happen when water resources are diverted without constraint.
"This [regulation] requires extraction limits to be set prudently and licenses and permits to be divided rationally and, or, traded. Pollution must also be controlled to make sure that existing resources remain usable."
The prospect of greater regulation will have implications on how investors access water investments. It could also affect whether water can become a commodity in its own right.
In the meantime, despite the theoretical arguments for investing in water, Marshall-Lee says it is not always easy to harness the water story in practise.
Many companies with water exposure have other less attractive divisions, he says. Also, the lead time before profits materialise can be long, leading to poorer short-term performance. Meanwhile, water equipment companies tend to be linked to the global capital expenditure cycle, meaning they suffer during an economic downturn.
"For this reason, many pure ‘water funds’ have a rather unattractive portfolio that fails to play the theme very well if you delve below the surface," Marshall-Lee says.
Illustrating the commodities performance advantage
Marshall-Lee says regulation is essential if water is to become a sustainable resource rather than one that is mined now at the expense of future generations. Water is often under priced and overused in water-intensive sectors like agriculture, where for historical reasons farmers can pay little or no money for licenses. This will need to change to prevent supplies being depleted.
He points to the Aral Sea disaster in Central Asia, where unmonitored irrigation caused the world’s fourth largest expanse of fresh water to dry up, as evidence of what can happen when water resources are diverted without constraint.
"This [regulation] requires extraction limits to be set prudently and licenses and permits to be divided rationally and, or, traded. Pollution must also be controlled to make sure that existing resources remain usable."
The prospect of greater regulation will have implications on how investors access water investments. It could also affect whether water can become a commodity in its own right.
In the meantime, despite the theoretical arguments for investing in water, Marshall-Lee says it is not always easy to harness the water story in practise.
Many companies with water exposure have other less attractive divisions, he says. Also, the lead time before profits materialise can be long, leading to poorer short-term performance. Meanwhile, water equipment companies tend to be linked to the global capital expenditure cycle, meaning they suffer during an economic downturn.
"For this reason, many pure ‘water funds’ have a rather unattractive portfolio that fails to play the theme very well if you delve below the surface," Marshall-Lee says.