Battles over water rights for survival and economic growth were dramatically depicted in the films "Chinatown" about Los Angeles and "The Milagro Beanfield War" about the American Southwest.

The present-day story unfolding over water's future may offer opportunities for investors able to envision it as a valuable commodity that benefits companies involved in its sale, distribution, purification and infrastructure.

Corporate raider and oilman T. Boone Pickens has been buying up water rights in the Texas Panhandle in the belief that water is going to become scarce and salable. This follows the logic that climate change, shrinking lakes and rivers and population growth will make increasing portions of the world susceptible to water shortages.

With that scenario in mind, governments and companies around the world are beginning to take steps to deal more effectively with the issue of water. The number of ways to invest in water-related companies has correspondingly increased.

Most mutual funds and exchange-traded funds specializing in the sector have been, at best, flat performers over the past year. That's more than you can say for many other investments, yet there is no escaping the fact that investing is an endeavor that requires considerable patience. Old perceptions of value don't change overnight.

"While water is the most crucial element of our lives, it has historically been cheap and we pay little attention to things that don't cost any money," said Neil Berlant, portfolio manager of the $19 million PFW Water Fund (PFWAX) in Los Angeles. "Water has been largely neglected from a business and investment standpoint, but that is changing because the price of water is rising."

His fund invests in a wide range of industries related to water.

Among its largest holdings are water utilities Consolidated Water Co. (CWCO) and Southwest Water Co. (SWWC); Watts Water Technologies Inc. (WTS), a manufacturer of products for controlling water quality and efficiency; Mueller Water Products Inc. (MWA), a maker of water flow control products; and Cantel Medical Corp. (CMN), which offers products and services in water treatment.

"There is really a long-term horizon for what is unfolding in the water industry, not a short-term story," said Berlant, whose fund was converted from an existing fund a year ago. "But I don't see anything high-risk or high-speculation in my portfolio because I invest in growth companies with above-average prospects."

No one is about to invent a "new" water, he noted, which assures long-term viability of the commodity. All food products that come from agriculture require irrigation and drinking water for livestock. Quality water is used in manufacturing, power generation and medical applications. Emerging markets, especially China, are putting greater demands on the water supply.

Another mutual fund, the $25 million Kinetics Water Infrastructure Fund (KWINX), down 2 percent this year, includes in its stock portfolio France's Veolia Environment (VE), a giant water treatment and waste treatment company. The fund's recent report to shareholders noted that global spending on water continues to grow at a 5 to 6 percent annual rate, with further infrastructure upgrades on the horizon.

"People don't consider water a sexy industry, but it has potential for investors looking for a steady growth group," said Stewart Scharf, equity analyst with Standard & Poor's Corp. in New York. "Water is needed for agriculture, manufacturing and drinking, and awareness has been heightened by natural disasters such as tsunamis, cyclones and earthquakes."

Only about 3 percent of the world's water supply is drinkable, and much of that is in the ground or in ice, Scharf said. That is making methods of rendering undrinkable water potable, such as desalination, more popular. In addition, many of the pipes used to deliver water are old and decaying. The Environmental Protection Agency estimates $277 billion will need to be spent to upgrade U.S. water systems over the next 20 years, he added.

The stock of water filtration companies Pentair Inc. (PNR) and Pall Corp. (PLL) both receive "buy" ratings from Scharf.

"Water investments are a way for individual investors to hedge and diversify their portfolios, perhaps investing 3 to 5 percent of their holdings with a long-term horizon," said Tom Lydon, editor of ETFtrends.com in Newport Beach, Calif. "What's considered a water company is not as purely focused as many people think, since it could include related things such as the technology that goes into the water supply."

With the primary growth of water-related investments currently in ETFs, Lydon points out the following:

• The $2.4 billion PowerShares Water Resources (PHO), which tracks the Palisades water index of companies in water treatment, water utilities, pipe and pump manufacturing. It is up 1 percent over the past 12 months.

Engineering and construction firms URS Corp. (URS) and Tetra Tech Inc. (TTEK), as well as irrigations systems firm Valmont Industries Inc. (VMI), are its largest holdings.

• The $386 million Claymore S&P Global Water (CGW), which tracks the S&P global water index of water utilities, infrastructure and equipment. It is down 7 percent over the past year.

• The $34 million First Trust ISE Water (FIW), which tracks the ISE water index of companies that derive a substantial portion of revenue from the water and wastewater industries. It's up 2 percent over 12 months.


Andrew Leckey answers questions only through the column. Address inquiries to Andrew Leckey, P.O. Box 874702, Tempe, Ariz. 85287-4702, or by e-mail at [email protected]