Water funds attract $ 35 billion as drought depletes reservoirs. New report asks if they’re worth it

As extreme droughts and water shortages plague the western United States and beyond, water funds have attracted an estimated $ 35 billion in assets under management, according to a new Morningstar report.

The trend comes as much of California faces voluntary water rationing this summer as drought dries up land, forcing some farmers to destroy crops and drains the reservoirs. This month, the United States also declared the first-ever water shortage of the Colorado River, a key supplier of water and hydroelectricity to households and farms in seven U.S. states and Mexico.

Morningstar examines whether the proliferation of water funds is worth it for investors.

“This is a niche that has been around for some time, but it is a niche that continues to grow as concerns about climate change-induced water shortages and interest in investing in means of s ‘adapt to them or avoid them, grow older,’ Morningstar research analyst Bobby Blue wrote.

The problem for Blue is that water funds are not just about water. Additionally, unlike energy and agriculture, none of the 65 open-water funds Morningstar tracked actually invests directly in water rights or offers direct exposure to the price of water. water.

“Rather, they invest in companies that fund managers say are exposed to the price of water, either by selling it, treating it or using it as an input,” Blue wrote, adding that this dynamics can give too much to water fund managers. leeway to decide what works best.

“There are countless ways to justify an investment as influencing the availability of clean water, and this flexibility, exercised at the manager’s discretion, leads to a broad investment menu,” Blue wrote.

The blurry lines also make it difficult to keep an eye on the reality of water-centric investing, without digging into each portfolio to verify their holdings.

Morningstar did some of that work by tracking the 10 most common holdings in U.S. water funds, which ranged from stocks of a water treatment and testing company Xylem Inc. XYL,
+1.33%
To Roper Technologies Inc. ROP,
-0.58%,
a manufacturer of smart water meters for utilities, at the healthcare center Danaher Corp. HRD,
+ 0.64%.

Popular actions of the water fund

The morning star

Beyond the main assets, Blue maintains that the connection to water “is diluted”.

For example, he found several exchange-traded funds named after PHO water,
+ 0.26%

PIO,
+ 0.09%
which had significant exposure to the shares of Water company. WAT,
-0.13%,
a life sciences company named after its founder, Jim Waters, but with little exposure to the natural resource. Other water fund managers have invested in Nike Inc. NKE,
+ 0.15%
and Hyatt Hotels Corp.
H,
+ 4.57%,
based on the view that these companies have become leaders in water efficiency.

“While commendable, these are not water companies,” Blue wrote.

Additionally, despite their “eclectic compositions”, aquatic funds are often “priced high” in terms of fees, but while primarily offering investors “exposure to old stocks”, they often “grow at the same rate as the big ones. stock market indices. ”

Morningstar also found that funds for water tended to be poor followed by the top national benchmark for the price of water. Almost a year ago, investors found a way to bet on the price of water thanks to the Nasdaq Veles California Water Index futures contract, designed to better balance the supply and demand of commodities and hedge price risks.

“This is rare for sector funds,” wrote Blue, adding that at this point “it is doubtful that you need a fund for water.

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