Since the first Earth Day in April 1970 and more importantly since the establishment of the EPA in December of that year, folks have been trying to make money out of water in the U.S..
Put simply, the returns have not been market-beating.
Because so much of the opportunity was my-little-crony stuff, at the whim of politicians, there was no consistency of growth at a time when other portfolio investments offered very competitive comparisons.
The alternative was to own the cash flow, private equity style, but unless one felt a passion for grit chambers and sludge pans it was pretty pedestrian, utility type ROI.
In fact the most reliable water investment in the U.S. has probably been York Water Company of York PA.
They've been paying dividends for 199 consecutive years and just announced their 575th divi.From Barron's:
The announcement carries the boilerplate "This release contains forward-looking statements"....
Water Asset Management: Hunting Liquid Assets
Water Asset Management managers Disque Deane Jr., Matt Diserio, and Marc Robert are betting that water prices will float higher still.
Water wasn’t an obvious investment theme when Matt Diserio and Disque Deane Jr. launched their hedge fund 10 years ago. Now, every day brings news of a water shortage or drought. So have the water stocks targeted by their Manhattan-based Water Asset Management enjoyed a panicky rerating?
Not yet. Drought-parched headlines still get upstaged by the latest dot-com initial public offering, so water remains mispriced by consumers and investors. That’s good for the half-billion dollars that Water Asset has in an equity hedge fund and a newer long-only fund focused on regulated water services, water resources, and the suppliers of pipes, meters, and treatment technologies. Upside remains.
“It is an old industry,” says Diserio, who manages the firm’s stock portfolio, “but it is just becoming a recognized asset class.”
Water investing’s upside is ensured by the urgency of our water needs and the fact that this resource remains very cheap in an absolute sense—compared with natural resources like timber or farmland, oil or gold. The average American family’s water bill is under $40 a month, notes Deane, giving the industry room to charge more to cover hundreds of billions of dollars in deferred maintenance and upgrading.
There’s no shortage of dire news. California just imposed the first statewide water restrictions in its history. Brazil’s megacity São Paulo may run dry this year. At Davos, the World Economic Forum declared that water crises will be the decade’s biggest social and economic risks. Yet, the two money managers believe that the world’s water problems are solvable. “There is no reason why any place in the world should not have water and wastewater services,” says Diserio. “The technology is there. The capital will be there. It is just a question of being implemented.”Diserio, 55, ran portfolios at several long/short hedge funds before starting WAM in 2005 with college chum Deane, also 55, who had spent a couple of decades working and investing in water businesses. As they launched their long/short fund, they were joined by WAM’s Chief Operating Officer Marc Robert, who had run equity research sales at Morgan Stanley. Now they’ve got a crew of analysts and advisors with expertise in water-utility operation, resources, regulation, economics, and technology.
While dowsing for long and short opportunities in water stocks, WAM has acquired water rights directly, waged activist campaigns, and even taken private a water utility. From the long/short fund’s start in 2006 though 2014, it averaged a compounded 7.79% annual return (after fees)—a bit less than the 7.98% of the Standard & Poor’s 500 but ahead of the MSCI All Country World Index’s 5.63%. The fund’s shorts let it outperform those benchmarks in down markets but have been a drag as markets have hit new highs. Hence the new long-only fund, where WAM hopes to extend the performance of its long portfolio, which averaged an 11.61% return from 2006 through 2014, comfortably ahead of benchmarks, such as the 9.49% of the S&P Global Water Index. The long/short fund has a traditional “2% and 20%” fee structure, while the long-only fund’s investors can choose to pay a 1.25% management fee and nothing for performance.
Sustainable water investments squarely fit within mandates for environmental, social, and governance investing. A supply of clean water prevents the spread of disease and frees women from the burden of water carrying. “The first rung to social stability,” says Robert, “is the ability to have access to clean water and sanitation.”
Some of the greatest need for infrastructure spending is, ironically, in developed places like Spain, Italy, and parts of the U.S., where water has been priced too cheaply and capital investment deferred on systems that are 50 to 100 years old.
AMONG THE SEVERAL DOZEN long holdings in WAM’s portfolios, one of their favorites is the global water utility Suez Environnement (ticker: SEV.France). The company provides drinking water and wastewater treatment in France, Spain, and a bunch of other countries including the U.S., where its United Water subsidiary is growing by striking deals to manage municipally-owned water plants, such as a recent one to run the sewage treatment plants of Nassau County, on New York’s Long Island.
Diserio notes that at the current price of 17.82 euros ($19.30), Suez trades at about 10 times free cash flow and has a 4% dividend yield. He and his colleagues think that Suez is worth €20. “They are an example of a company that is well positioned to generate returns in the wave of privatization activity that is unfolding,” says Diserio.
Another utility with predictable earnings growth is Aqua America (WTR), a company with service territories and assets in states like Pennsylvania and New Jersey, where governments are interested in upgrading water infrastructure and have authorized the company to earn returns on equity between 9% and 10%. Recent regulatory proceedings will allow Aqua to raise its rates....MORE
