* Niche corner of investment world with $6 bln in assets
* Summit Global sees absence of competition as an opening
* Pure-play water funds heavily invested in illiquid assets
By Manuela Badawy
Dec 12 Money manager Bill Brennan spends
most of his waking hours thinking about something most
Americans take for granted: water.
It may be the most essential of all commodities because
without it none of us would be alive. But as an investment,
water has had neither the glitter of gold nor the allure of
But Brennan, a 49-year-old mechanical and biomedical
engineer, is one of a small group of investors who are
increasingly seeing an opportunity to make money from water.
"We look at water 100 percent all the time," said Brennan,
a portfolio manager of the San Diego-based Summit Global
Management, a 12-year-old hedge fund established by John
Summit, which Brennan says has about $500 million in assets
under management, is one of a handful of U.S. funds that
specialize in investing almost solely in stocks of water
companies, reservoirs, land sitting atop aquifers and
It is a niche corner of the investment world with about $6
billion in assets. There are fewer than a dozen of pure-play
water-investment funds globally, a drop in the bucket compared
with other commodity-based funds.
But the sector is one that some see as an opportunity to
make money as fresh water becomes scarcer in parts of the globe
due to population growth, farming and industry.
They say water funds are poised to reap the rewards of the
need to replace aging and crumbling water and sewer systems.
Infrastructure needs in the United States alone will require at
least $500 billion over the next 20 years, according to the
U.S. Environmental Protection Agency.
But skeptics say water investing carries a good deal of
risk and the market's small size is an indication that many
money managers are not sold on the growth potential. Others
note pure-play water funds are often heavily invested in
illiquid assets -- like water rights -- which can be hard to
value or trade.
"We typically wait for a disaster to give us a wake-up call
to invest in change -- or if we take a big hit in the wallet."
said Dawn Van Zant, president and founder of Water-stocks.com.
THE MAN BEHIND WATER
For a water bull like Brennan, the absence of
competition is an opening. He says he regularly looks at about
400 companies that derive at least one-third of their revenue
from water-related businesses. Some of the businesses on his
potential shopping list include pump or filter companies, as
well as engineering and construction.
Among Summit's top stock picks are American Water Works
(AWK.N), Brazilian company Companhia de Saneamento Basico
(SBS.N) and ITT Corporation (ITT.N).
About half of Summit's money is invested in stocks, says
Brennan. The firm's most recent 13-F filing with the U.S.
Securities and Exchange Commission reports that its funds hold
$96 million in U.S. stocks, and Brennan said the fund also
holds foreign securities for a total of some $250 million worth
in equity holdings.
Summit Global also owns $250 million in water rights, or
entitlements to access water sitting beneath working farms in
the western United States and southeast Australia, where acute
water scarcity and open markets allow for the development of
"For some people it may be boring and may not be fast
enough," Brennan said. "The water business is an ideal
investment for endowments, family offices and people that have
a long-term horizon and understand the underlying growth
metrics in the business and are looking for those expected
returns of 6, 8 or 10 percent a year."
The compounded annual return for one of Summit's main funds
is 9.4 percent since its launch in 1999, according to an Oct.
31 marketing document seen by Reuters. Over that same period,
the Russell 2000 small cap has returned 5.8 percent.
The marketing documents show that some of Summit's best
returns came from 1999 to 2006, when it averaged high
double-digit gains. But since then, returns have come back down
to earth. In 2010, the fund returned 7.76 percent and through
October this year it was down 1.3 percent.
"Our underperformance the last few years versus the S&P is
correlated to our value approach. The risk trade from March
2009 has been a difficult time for many institutional value
investors," Brennan said, adding that the large exposure to
utilities capped gains, as they did not participate in the
"Since we look at five- and 10-year performance vs.
quarter-to-quarter or year-to-year, our approach is suited for
a patient and prudent investor with a longer horizon as an
investor and not a trader."
One of Summit's few U.S. competitors is hedge fund Water
Asset Management, which has been around since 2006 and is fully
invested in water, with some $300 million in assets.
Competition also comes from mutual funds that are eyeing
the space. The best-known U.S.-based actively managed mutual
funds are Allianz RCM Global Water Fund (AWTAX.O) with $72
million in assets, PFW Water Fund PFWAX.O with $17 million,
and Kinetics Water Infrastructure Fund (KWIAX.O) with $16
The largest funds are in Europe, led by Geneva-based Pictet
Global Water Fund with $3.4 billion in assets, SAM Sustainable
Water Fund based in Zurich with $1.3 billion in assets, and
Kleinwort Benson Investors, the adviser for the Ireland-based
Calvert Global Water Fund (CFWAX.O) with $62 million.
Todd Petzel, chief investment officer at Offit Capital
Advisors, which manages $6 billion for wealthy families and
non-profit institutions, says it is difficult to find a
pure-water play. He quips that many so-called water funds "are
polluted" with other non-water investments.
Petzel's says his strategy for clients looking to invest in
water is to find specific projects via a private equity deal
where clients have a long-term stake in water rights in an
Maybe one of the best-known water investors is Texas
billionaire T. Boone Pickens, more commonly known as an oil
man. He is the largest individual water owner in America, with
rights over the Ogallala Aquifer in the Texas panhandle, the
third-largest underground aquifer in the world.
It supplies 27 percent of all irrigation in the United
States and 70 percent to 90 percent of the irrigation water in
Kansas, Texas and Nebraska, three of the most important grain
producers in the country, according to industry data.
Another way to play water is to invest in desalination
technology, which produces fresh water from sea water.
Companies such as California-based Energy Recovery Inc
(ERII.O), which through its high-efficiency devices has reduced
the high cost of desalination, could benefit from clean water
demand. The company has more than 80 percent of the global
market share in energy-saving pressure exchangers for
desalination, but just 8 percent of its business comes from the
United States, its CEO Thomas Rooney told Reuters.
Although the United States is the largest single water
market, most of the companies in the water-funds derive their
revenues from emerging markets, especially from Asia. China
alone has 21 percent of the world's population but only 7
percent of the renewable water resources.
"Water is at the heart of everything you do. You can't
manufacture or grow anything without the availability of
water," said Neil Berlant, head of the water group at Crowell,
Weedon & Co, managing about $70 million.
(Reporting by Manuela Badawy; editing by Jennifer Ablan,
Matthew Goldstein and Maureen Bavdek)