A US$2.1 billion Invesco fund offers way to invest in water risks

THE case for investing in water is gaining traction because of rising demand and a scarcity of clean water.

That’s the opinion of analysts at Morningstar.

In a report marking World Water Day, analyst Mahi Roy spotlighted five US-based funds, as well as some companies, that focus on expanding access to water, improving water quality and providing solutions that address other water challenges.

The US$2.1 billion Invesco Water Resources exchange-traded fund is by far the industry’s largest fund. Other offerings that make Morningstar’s list of highest-rated funds are Calvert Global Water, Invesco S&P Global Water ETF, Virtus Duff & Phelps Water and Ecofin Global Water. “Investors looking for exposure to the reliable supply of safe freshwater should carefully consider these investments as part of a well-diversified portfolio,” Roy said. “It’s a small landscape, but it’s also very diverse.”

In all, there are 11 water funds in the US with a combined US$6.3 billion of assets. All the funds except one – IQ Clean Oceans – devote more than two-thirds of their portfolios to companies that generate the bulk of their revenue from water management and sanitation activities, according to Morningstar.

Here are the five most widely held stocks by water funds:

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• American Water Works;
• Advanced Drainage Systems;
• Xylem;
• Pentair; and
• Ecolab.

While “few options exist that can be categorised as pure-play water companies”, due to the challenges of investing directly in water rights, the funds hold companies that “work to ensure the availability and sustainable management of water”, Roy said.

And the funds have been performing relatively well. The Invesco Water Resources fund, for instance, gained at an annual rate of almost 12 per cent during the past three years, roughly matching the returns of the S&P 500. The First Trust Water and Invesco S&P Global Water, the sector’s second and third-largest funds, rose 10.4 per cent and 6.1 per cent respectively in the same period.

Still, the market for water funds, like other environmental, social and governance offerings, has been tough. The funds suffered combined net redemptions of more than US$150 million during the fourth quarter of last year. In addition, no new water funds opened in 2023 and that followed a year when only one fund – the Ecofin Sustainable Water Fund – was introduced. The Ecofin fund was ultimately liquidated after only a year when it failed to attract enough assets.

But Roy’s ultimate conclusion is water funds offer “a thematic investment opportunity”, particularly in a world where access to clean water is becoming more and more scarce. BLOOMBERG