• 
• 

Published on April 16, 2008

Amid the Songkran heat and tonnes of water being hurled about in the interests of "good clean fun", it has probably crossed very few minds in Thailand that in some parts of the world, clean water is becoming as scarce as oil.

Moreover, it is not only developing countries that have become "illiquid". First World nations like Australia and the US have also been battling serious droughts.

The fact is the world is facing a water shortage - even more so when humanity is competing with thirstier crops like corn for ethanol and Super Rice, which may deliver a great deal more grain but also needs a lot more water. Why, then, have water funds suffered a double-digit drop?

When PrimaVest Asset Management's PrimaVest Dynamic Water Fund (PDW) was launched here last October, Malcolm Thomas, director of structured products at Societe General Corporate and Investment Banking, waxed lyrical about the merits of the water sector. His colleague, Andrew Au, also told the Hong Kong media last year that the sector - water utilities, treatment and infrastructure - "outperformed both gold and oil recently, with less volatility".

The drop has apparently come from systematic risk.

"The market is very risk-averse now. And this also affects the [water] sector," said Siriporn Suwannagarn, first vice president and fund manager at PrimaVest.

Siriporn holds onto the rationale that developing countries need new water-supply infrastructure, and the developed world will spend a lot of money to repair and maintain theirs.

The West's ancient treatment and logistic systems need a lot of resuscitation. For instance, the Northumbrian Water Group said only 37 per cent of Essex, England, had water meters last year, and leakage was well above manageable levels.

Unlike ING Funds' ING Global Water Fund (GWF), which invests in the exchange-traded S&P Global Water Index Fund, the PDW takes a very active and rather complex approach, investing in structured notes.

The PDW's feeder fund, the Lyxor Dynamic Water Fund, varies its exposure to the World Water Total Return Index, which it mirrors. The index focuses on European water companies at half of regional breakdown, with the remainder split between Asia, at about 20 per cent, and the US.

This flexibility means the fund can have as much as 150 per cent exposed, Siriporn said, although that is probably not going to happen in the current sub-prime economically suppressive environment.

PrimaVest's complex derivative-laden investment means it is also more volatile - if the timing is off. Its unit price has been hovering at about Bt8 since the beginning of the year, despite the feeder fund revising exposure to about 60 per cent at one point.

Comparatively, ING Funds' GWF fares a few points better, averaging Bt9 over the same period.

Still, Siriporn is adamant the water sector will benefit from global warming. Unlike soft commodities, which have obvious cycles, water is even more downstream.

But investing in water is a very long-term business. A recent Organisation for Economic Cooperation and Development environmental report for 2030 suggested water companies start planning their business 25 years in advance.

Such long-term investment prompts the question of whether one should be paying a 1.75-per-cent management fee (1.5 per cent for ING's GWF). And that, I suppose, depends on whether one sees the glass as half-full or half-empty.

Ki Nan Tsui

The Nation