Water may be the world's most critical commodity. But it has been a tough market for many investors to tap profitably lately.
Since last summer, a flood of investment vehicles have hit the market, seeking to capitalize on the rising global need for clean water. But many have proved disappointing in the past few months.
For one, water-oriented stocks — from big conglomerates like General Electric Co. to equipment suppliers like Mueller Water Products Inc. — are exposed to broader economic problems, including the housing slowdown.
Investors can't trade water like other commodities, because it isn't priced on a global market. It's heavy and expensive to transport, so it lends itself to regional markets.
Some of the best water stocks are expensive because investors have been forced to pour into a small set of opportunities.
Many investors in the initial public offering of Mueller Water Products in 2006 expected demand for the company's valves, hydrants and pipes to hold up as long as water systems needed improvements. But since last June, Mueller's stock has plunged by roughly half. Still, it trades at 32 times last year's earnings.
"What you're buying is essentially a supplier to residential construction companies," said Rod Parsley, portfolio manager of the Perella Weinberg Partners Oasis Fund, an approximately $500-million hedge fund focused on water, clean technologies and alternative energy.
Water use drops in a recession: 40 percent of fresh water in the U.S. is consumed in industrial applications. That is why many water utilities have fallen on recession fears.
Two of three exchange-traded funds that track water-related stocks have sunk since their mid-2007 debuts. The third, First Trust ISE Water Index, is up 4.1 percent since its May 11 launch. But since June 13, after all began trading, it has posted a gain of 1.9 percent. Since then, Claymore S&P Global Water ETF has lost 5.5 percent and PowerShares Global Water Portfolio dropped 11.9 percent.
This year, only First Trust and PowerShares Water Resources Portfolio, launched in 2005, are outperforming the S&P 500.
"There's a lot of money to be made in water, but it's a lot trickier than just picking a basket of companies ostensibly participating in the sector," said Parsley.
Over the longer run, it is a better story. Water-focused investing was a niche in 1999, when John Dickerson started San Diego-based Summit Water Equity Fund. The hedge fund now has $600-million in assets. The fund has more than tripled in value during that time, according to Dickerson.