Of course, many large water funds may suffer from their
strategy of taking exposure to huge, diverse, international firms, which may
produce only a small amount of their overall profits from the water sector. "Be
wary of funds that have very little trading volume and high expense ratios,"
warns Jason Cole, wealth advisor with Philadelphia-based Abacus Wealth Partners.
Cole also counsels individuals to avoid funds investing in companies that have
minimal water utility exposure.
According to Czarniak, investors derive real value in the water
game by investing in smaller, more nimble companies operating in the water
sector. "Water is a small-cap sector," he says, "It’s best to take advantage of
those smaller-cap opportunities, rather than companies like Nestlé and General
Electric."
Many investment banks now sell structured notes designed to
give investors exposure to the water industry. Structured notes are more popular
in Europe and Asia than in the United States, though they are said to be
attracting more investor interest in North America. Dutch bank ABN Amro has a
product on the market called the Water Index Protected Plus Note. This is linked
to a proprietary index it created in conjunction with Standard & Poor’s: the
S&P Custom/ABN Amro Total Return Water Index. Only stocks that S&P’s
analysts judge make at least 60 percent of their revenue from water can be
included in the index. The fund also consists of large international players
such as Veolia which, according to S&P, generates roughly 65 percent of its
revenues from water. The notes offer exposure for six years and come with a
guarantee that investors will get at least their initial investments back after
that time.
Credit Suisse offers another structured note, a three-year
product in its Global Water Basket, which offers exposure to 25 water-related
stocks but with no capital guarantee. Products like this can be purchased
through private banks.
A small number of water-focused exchange-traded funds are
offered on the public markets. In May, for example, Claymore Advisors launched
the Claymore S&P Global Water Index ETF on the American Stock Exchange. It
tracks an index of 50 water-related companies, from water utilities to companies
involved in well drilling and water testing. PowerShares offers its Water
Resources Portfolio ETF, which is also listed on AMEX. It tracks the Palisades
Global Water Index of global companies operating in the water sector.
John Ferry is an Edinburgh, Scotland–based financial journalist
and a senior correspondent for Worth.
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