Tuesday, August 7, 2012

More On H2O Investments: Uninvestable Water (PHO; FLS; AWK)

 Following up on "It's So Hard to Find a Decent Bet on Water (investment vehicles)"
Great minds and all that.
Condor Options saw the same Alphaville story and did this post (which just hit one of the feed readers):
Water is one of those investment themes that comes up from time to time. It seems like there are a few different stories:
  1. Delivery. People understand this story intuitively: everybody needs water, some places don’t have enough of it, and since you can move it around in bottles and pipes, water is an excludable good. Excludable goods can be profitably sold.
  2. Technology and Filtration. Water delivered where you want it does no good if it’s dirty, or if it takes forever to get there.
  3. Retail therapy. There is also the story in which people in places with plenty of water buy more water (sometimes, non-excludable public water from themselves) in order to identify with the values or status implied by branding. Nobody buys VOSS because it tastes so much better. Wind turbines. Iconic bottle design. Carbon neutrality. 
Investing in water means in investing in one of these stories. Story #3 isn’t really about water, it’s about consumer spending and effective marketing, so we can leave that aside. Story #1 is in the news a lot right now, since the drought in the midwest has ruined the corn crop. The primary mechanism for global water delivery is still the natural water cycle, right? Jason Abbruzzese explains over at FT Alphaville why investing in water shortage scenarios is so difficult: the OTC derivatives that can be structured to offset risks for natural water “shorts” (agricultural commodity producers) don’t make for attractive general investment vehicles.

That leaves story #2, which is all about using technology to improve the efficiency with we deliver water and its cleanliness upon arrival. The PowerShares Water Resources Portfolio ETF (PHO) is a story #2 play, but as Abbruzzese mentions, the ETF has acted in recent weeks like a proxy for the S&P 500. In fact, PHO looks like a lagging market proxy on a longer timeframe, too.

PHO vs. SPY weekly returns, 2009 – 2012. Source: TD Ameritrade