Invest Like a Billionaire: Water Is The New Gold

photo: Pink Sherbet Photography

Last year, legendary investor Warren Buffet bought a water treatment provider, Nalco Holding Company, adding to other water-related investments in his wildly successful portfolio.  (As of March 30, 2010, a single share of his company, Berkshire Hathaway, could be bought for $122,459.)

The move sent ripples through the investing community: a clear signal that investing in water is an untapped opportunity. Water, like oil, is finite. There is only so much ocean saltwater, glacier freshwater and water in the air, while global consumption is growing twice as fast as the world’s population.

Climate change affects how and where this resource is delivered around the world, with more intense rainfalls and dry spells impacting everything from the food cycle to manufacturing to drinking supplies. Climate change is expected to account for about 20% of the global increase in water scarcity in coming years. The World Bank estimates water availability will change dramatically by the middle of this century, leading to what some have called “water wars.”

New water management technologies are the key to managing water scarcity. Buffet’s investment in Nalco, which had $3.7 billion in sales in 2009, is one example. The company helps its industrial customers reduce water and energy use. For example, it claims it 3D TRASAR® cooling water technology has saved more than 200 billion gallons of water. Nalco is also teaming up with organizations like the World Wildlife Fund to help develop ways to conserve water. The company’s stock price has doubled over the past year.

Also doing well is Buffet’s investment in General Electric: the company’s stock price is over 70% over the past year. About a quarter of the company’s total revenue is in energy infrastructure, which includes wind and oil as well as water, up from 17.8% of revenue just two years ago.

In a recent interview with the nonprofit news site Circle of Blue, General Electric Water’s director of marketing Jeff Fulgham identified two drivers for GE’s water business: helping manage water demand by creating new supplies through desalination, and water re-use technologies (the company itself has committed to reducing its consumption of water by 25% by 2015), as well as helping improve water quality.

The World’s Water Crisis

Water quality is a concern in the U.S. and around the world. The New York Times recently ran a series called “Toxic Waters” that exposed the worsening pollution in U.S. water systems and lax regulatory responses – despite the Clean Water Act, which helps regulate 100 pollutants. The fact remains that most of the pipes in the U.S. are over 100 years old; the American Water Works Association (AWWA) estimates that domestic water utilities will need to invest $330 billion over the next 20 years to replace aging pipes and treatment plants.

The rest of the world faces even direr water problems. China has 21% of the world’s population but only 7% of the renewable water resources. The country’s spending on water infrastructure reached $250 billion in 2008. By some accounts, the lack of clean water and sanitation slows the world’s economic growth by $556 billion each year.

Industry Players With a Future

Companies that can fix broken water systems are set to benefit from President Obama’s stimulus dollars, which are expected to flow in 2010. “The plan divides $21.4 billion to water and environmental infrastructure and $30 billion to building infrastructure, which should be allocated within the next four years,” says Michael Gaugler, an equity analyst who covers water for Brean Murray, Carrett & Co. He recommends Tetra Tech for the expected revenue uptick it will get for its consulting, engineering and technical services focused on water. (Buffet, meanwhile, also owns privately-held pump-maker Wayne Water Systems.)

The best opportunity at the moment may be publicly traded water utilities, says John Dickerson who runs Summit Global, a water focused investment fund based in San Diego. “Water utilities are the subject of benign neglect,” he says. “[They] are basically trading at a discount to the regulated asset base.”

Case in point: Aqua America, one of the country’s largest publicly traded utilities operating in 13 states which has been trading below last year’s stock price. Meanwhile, American Water Works, with an even larger reach in 19 states and across Canada, is trading around the same price as last year.

“Utilities are cheaper than they have ever been,” Dickerson says.

Invest Like Buffet – On a Budget

To be sure, unless you have a sizeable portfolio and feel comfortable investing in individual stocks, you may simply consider a fund like Dickerson’s, which has been around since 1999. Several new water-focused funds have launched over the past five years as well. Brennan Investment Partners’ Kinetics Water Infrastructure Fund invests in companies that provide solutions to water industry problems; Credit Agricole Funds Aqua Global and FourWinds Capital’s Aqua Resources Fund are also on the water scene.

As always, diversification should remain a key part of your investment strategy. Gaugler suggests that 10% to 20% of one’s portfolio may be invested in water, but depending on your risk tolerance and investment horizon, that may not be the case for you.  Many individual investors may be better off dedicating a smaller share to that – or any other — industry. Be sure to consult with your financial planner or adviser (if you have one) before making any radical portfolio moves.

Tatiana Serafin, a former staff writer at Forbes, now heads Global Markets and Ideas.