Invest Like Matt Damon: Invest in Water

As pressures on our planet's water supply mount, investors are increasingly pouring money into solutions providers in the hopes of reaping a reward. However, smart investment in water involves more than just buying shares in utilities and filtration companies.

Matt Damon gets that, which is why he and Gary White co-founded water.org, pioneering market-based solutions to provide safe water and sanitation access around the world. Their organization recognizes the complexity of the water landscape. So should investors, if they wish to get the most out of the water theme.

There's an app for that.
Fortunately, there's an app for that. Today, Calvert Investments released its Calvert Water Investing App to the public. The move is a first in the investment management industry, and not just because it's the first mobile app focusing on a major natural resource investing theme. It's also completely free, so individual investors can use it even if they don't buy into Calvert's funds. Pretty generous, eh?

But let's step back and look at why you should play water as an investment theme in the first place.

  • A 2013 World Economic Forum report declared water scarcity to be one of the top global risks facing companies in the 21st century.
  • The energy sector depends more on water for industrial purposes than any other global consumer, and shortages are already compromising output and increasing costs in some of the world's most productive energy sources.
  • Only 3% of the water on this planet is freshwater and, of that, less than 1% is available for human consumption. Nevertheless, demand for freshwater is growing twice as quickly as the global population.
  • In the U.S., aging water infrastructure leaks 20% of total volume. Replacing that infrastructure would cost an estimated $300 billion to $1 trillion. 

Investors are taking note of this situation and its repercussions. In a 2011 essay for Citigroup, "Water as Seen by an Economist," Willem Buiter offered this declaration:

I expect to see a globally integrated market for fresh water within 25 to 30 years. Once the spot markets for water are integrated, futures markets and other derivative water-based financial instruments -- puts, calls, swaps -- both exchange-traded and OTC will follow. There will be different grades and types of fresh water, just the way we have light sweet and heavy sour crude oil today. Water as an asset class will, in my view, become eventually the single most important physical-commodity based asset class, dwarfing oil, copper, agricultural commodities and precious metals.

Liquid gold
So, how are investors approaching water as an investment strategy? Calvert launched the Calvert Global Water Fund (CFWAX) on September 30, 2008, which has done pretty well since. The average annual total returns at net asset value for the period ending September 30, 2013 are 11.7% year to date, 19.8% in the last year, 12.8% in the last three years, and 8.4% since inception. Consider some of their recent top holdings.

  • Danaher (NYSE: DHR  ) offers testing and analysis for municipal and industrial clients, as well as treatment and disinfection systems. Interestingly, Danaher excels at tackling the growing problem of invasive species in marine environments that hitch rides to new places in ship water tanks
or cargo holds. Calvert identifies this is a growing, multi-billion-dollar market opportunity, and sees Danaher as a leader in the space.
  • American Water Works (NYSE: AWK  ) is a water utility, so that probably seems obvious; but the company is taking a leadership role in addressing broader issues of water scarcity, particularly as they relate to climate change. American Water Works is developing new systems and methods to make their infrastructure more resilient to major storms after suffering significant losses associated with a recent increase in damaging hurricanes and other weather events. American Water has also partnered with other companies to communicate more fully with the public about climate change's impact on business.
  • Xylem (NYSE: XYL  ) is a global water technology company. The company's tag line is, "Let's Solve Water." Xylem has published a white paper on urban water scarcity, and positions itself as a partner with municipal water managers in addressing their challenges in meeting demand for clean water. Beyond providing products and services, Xylem offers thought leadership on the broader water problem, and how best to manage it.
  • Flowserve (NYSE: FLS  ) sells valves and seals to industrial processors, refineries, and chemical plants. While Flowserve's water division only accounts for around 10% of revenues, its power division plays a role in managing water needs, as well. Closer analysis reveals that Flowserve derives closer to 30% of its revenues from water-related services.
  • Sabesp (NYSE: SBS  ) is the top holding in the Calvert Global Water Fund. The Motley Fool also recommends the company in its Income Investor newsletter. Sabesp is a big Brazilian water utility that serves more than 20 million people. The company serves more customers than all but two other water and sewage utilities in the world, and it's the biggest in the Americas. With a capacity of more than 2.5 billion liters of water, Sabesp is charging ahead on large-scale water solutions.

How do I get started?
If you're ready to play the water theme, opportunities abound. Look for purification and desalination technologies, transportation and storage solutions, and innovations that allow more efficient water use across sectors and applications. And hey... if you need a little assist, Calvert just gave you a free app that will get you well on your way. Not only should it be good for your portfolio, but Matt Damon will be eternally grateful.

Invest in water? I'm not sure how to invest at all!
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