According to a new Morningstar report, as extreme drought and water scarcity affect the western United States and beyond, water funds have attracted about $ 35 billion in managed assets.
The trend comes as much of California faces voluntary water rationing this summer as drought dries the land, forcing some farmers to destroy crops and drain reservoirs. This month, the United States also declared the first water shortage on the Colorado River, a key supplier of water and hydraulic power to homes and farms in seven U.S. and Mexican states.
Morningstar examines whether the proliferation of water funds is worthwhile for investors.
“It’s a niche that has been around for a long time, but it continues to grow, as concerns about water shortages induced by climate change and interest in investing in ways to adapt or avoid them grow,” he said. analyzes Morningstar research Bobby Blue wrote.
Blue’s problem has been that water bottoms are not limited to water. Also, unlike energy and agriculture, none of the 65 free-standing water funds tracked by Morningstar actually invest directly in water rights or provide direct exposure to the price of water.
“Rather, they invest in companies that fund managers believe have exposure to the price of water, either by selling it, treating it, or using it as input,” wrote Blue, who added that this dynamic it can give water fund managers too much to move on to decide what fits the bill.
“There are countless ways to justify an investment influencing the availability of clean water and this flexibility, exercised at the discretion of the manager, leads to a broad menu of investments,” Blue wrote.
Blurred lines also make it a challenge to keep track of what water-focused investments really are, without delving into each portfolio to examine their holdings.
Morningstar was part of this work by tracking the ten most common holdings of U.S. water funds, which ranged from the actions of the water testing and treatment company. Xylem Inc.. XYL,
a Roper Technologies Inc.. ROP,
a manufacturer of smart water meters for utilities, for sanitation Danaher Corp.. sir,
Beyond the major stakes, Blue argues that the water connection is “diluted”.
For example, he found several publicly traded funds bearing the name water PHO,
who had considerable exposure to the actions of Waters Corp.. WHAT,
a life sciences company named after its founder, Jim Waters, but with little exposure to natural resources. Other water fund managers have invested in it Nike Inc. DE,
i Hyatt Hotels Corp.
based on the view that these companies have become leaders in water efficiency.
“While this is commendable, it’s not about water companies,” Blue wrote.
What’s more, despite their “eclectic compositions,” water funds often “come at a high price” in terms of commissions, however, even though they give “investors a clear equity exposure,” so often “move with large market indices”. ”
Morningstar also found that water funds used to be poor trackers of the nation’s first benchmark in terms of water price. Almost a year ago, investors won a way to bet on the price of water through the Nasdaq Veles California Water Index futures contract, designed to better balance commodity supply and demand and price risks. coverage.
“This is uncommon for industry funds,” Blue wrote, adding that at this time “you doubt need a bottom of water ”.