As the UK, notorious for its rainy climate, has just imposed a hosepipe ban after its driest two-year period ever, WealthBriefing takes a looks at water-related investment.

In terms of embedded capital the water industry is one of the three largest in the world, alongside oil and gas and electrical power, according to a recent research report by Summit Global Management, a firm specialising in water-related investment.

The report by the San Diego-based investment company shows that water utility stocks have outperformed many major indices in the US over the past 20 years with an annualised return of 11 per cent since 1991. By comparison, the S&P 500 Financials Index has seen an annualised return of 6.26 per cent over the same period.

The report also puts water industrials in favourable light, with an annualised return of more than 13.5 per cent between 1991 and 2011.

Looking forward, Summit Global Management sees investment opportunities stemming from the familiar economic difficulties in some eurozone countries, as regional and central governments in Spain, Portugal and Greece are looking to privatise utility companies.

The company also sees openings in agriculture irrigation and associated firms. Summit highlights that 80 per cent of all water usage in arid regions goes to such irrigation, and it is an area which private equity firms have singled out as a key opportunity for several years.

Investment in solutions

UK-based WHEB Asset Management believes that the best way of capitalising on water shortage is to invest in the solutions to the problem. “Water is considered by many, including industry, to be a free and abundant resource and more efficient monitoring of water usage and appropriate pricing is vital if resources are to be better conserved,” Clare Brook, a founding partner of the firm, told WealthBriefing.

Brook identifies three main themes when picking stocks for her firm’s IM WHEB Sustainability Fund: demand control; increasing supply in parts of the world where it is scarce; and desalination as 97 per cent of the water in the world is salty.

In the first category, she highlights New York-listed Elster, a company that provides metering and communication systems for utilities to enable more efficient water usage, and Germany’s Geberit, which she describes as a pioneer of a range of environmentally-friendly sanitary and piping systems.

China is destined to surpass the US as the world’s biggest economy in the next few decades and is increasingly flexing its economic muscles on the world stage. At the same time, two-thirds of its rural population do not have access to clean drinking water, according to Brook. On that basis, she sees plenty of potential in Sound Global, an investment holding company listed in Frankfurt and on various Asian stock exchanges which provides water and wastewater treatment solutions in China.

Brook also emphasis Japan’s Torishima Pump, which sells desalination equipment to countries in the Middle East, one of the world's driest regions.

“Companies providing solutions to this pressing problem represent the very best sort of long-term investment; good for the planet and good financially,” she said.

Water ETFs

Besides stock picking, there are various exchange-traded funds that track so-called water indices. Invesco Powershares has two water ETFs: one US-based tracking the NASDAQ OMX US Water Index and one global tracking the NASDAQ OMX Global Water Index. The ETFs invests in a range of companies, including utilities and industrials. Other popular ETFs are the Guggenheim S&P Global Water Index ETF and First Trust ISE Water Index ETF.

But investors who are committed to pure water investment might want to discount such ETFs as their correlation to major indices sometimes rise to mid-90 per cent, according to Summit, one of these investors. This means that they often invest in big conglomerates which may have big water divisions but whose total revenues have many different sources.