Water fund focuses on delivery, not control

(March 2007) Since it’s a basic requirement of life, the notion of commoditizing water can make people uncomfortable. As a commodity, it has no replacement, nor can consumers simply strike it from their daily lives.

But with climate change, natural disasters and sheer global population growth, there is no question that clean, fresh water is increasingly in demand. It is against that backdrop that Criterion Investments has introduced the Criterion Water Infrastructure Fund.

Criterion’s president, Ian McPherson is eager to dispel any perception that an investment focused on such a vital commodity would necessarily be exploitative.

“It would be difficult for people to believe that you should have poor people in the world that couldn’t afford their water bills,” he explains. “This isn’t about that. It’s about an infrastructure to deliver that water to the world, which is a necessity. This is not driven by price increases.”

McPherson points out that the fund would not be considered an SRI fund, but he stresses that the fund’s investment mandate does not include the trading of water rights.

“This isn’t about buying water rights at $1 per unit and trying to sell them at $3,” he says. “The vast majority of citizens believe that water is a natural and social right, and that control should remain with the people.

“The fund does not require any consolidation or privatization. Water is still a social right.”

Using the oil industry as a parallel, the fund would invest in pipelines, refineries and new technologies surrounding the commodity, rather than the exploration and production of the commodity itself.

The goal, McPherson says, is not to make money from fluctuating prices of water but to profit from the provision of the resource to areas and people in need of water.

“It’s not a classic sector fund that has the same boom-bust cycle. We have very different profit models,” he says. “You have to remember that a regulated utility makes money off its invested capital base — the more it spends, the more it makes.”

In Canada, the apparent abundance of water makes it easy to forget the scarcity that much of the world faces. But even in Canada, McPherson says opportunity abounds. Municipalities face crumbling infrastructure, requiring billions of dollars of investment. Obviously, no level of government manufactures its own pipes and valves, and much of the installation work is outsourced.

McPherson says water consumption outpaces population growth by a 2-to-1 margin, because only a small percentage of fresh water is consumed as drinking water. Agriculture uses up to 75% of the world’s fresh water, and with the push toward ethanol as a petroleum alternative, the quantity required by farmers will only climb.

In terms of competition to this fund, there is already an ETF in the U.S., the PowerShares Water Resources, but this product includes investments in companies like General Electric. While GE is one of the biggest players in the water industry, only a small proportion of the conglomerate’s revenues come from its water-related businesses.

The Criterion fund requires a minimum of 20% of revenues from the water sector, but McPherson says the actual holdings will average more like 70%.

The idea of a fund that invests exclusively in the water industries is one that McPherson has been kicking around for a while, dating back to the 1980s when Margaret Thatcher privatized water utilities in the U.K., where McPherson was working at the time.

Over the past two years, he has been pitching the idea to advisors across Canada and getting mixed feedback.

“At the time that we first mentioned it, it was either the number-one idea for advisors, or it was at the bottom of the list. Some just couldn’t get their head around it,” he says. “We have no investable universe to speak of.”

The biggest names in the Canadian water industry — Zenon and Trojan Technologies — were both taken over in recent years. Europe, on the other hand, is home to some massive publicly traded water companies, including Suez and Danone, for example. Not surprisingly, the Criterion fund invests globally.

“When we spoke to advisors, particularly post-Halloween, people realized that income trusts are not a one-way ticket,” he says. “The water industry is a very strong income and growth story. We achieve the global diversification we want.”

The Criterion fund is sub-advised by Geneva-based Pictet Funds, with an indefinite exclusivity clause for the Canadian market. Pictet manages one of only three major water-focused funds, and is the oldest, having launched in 2001.

The investment strategy is described as GARP, and the fund aims to provide an annual yield of 5%. It is available in hedged and non-hedged versions and in the usual array of compensation options. The various combinations of hedging options and compensation structure result in a total of 10 different fund codes.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com

(03/01/07)

Steven Lamb