A top strategist at Bank of America Corp.'s Merrill Lynch unit is asking the firm's more than 14,000 financial advisers to consider an alternative asset to buoy sinking commodity returns: water.
It may not be listed on the
New York Mercantile Exchange alongside traditional commodities such as crude oil, gold and silver, but Merrill Lynch's Mary Ann Bartels said investments attached to the clear liquid may become as important as precious metals and energy as the world's sources of clean water dry up.
Much of the world's water is either not potable or unreachable, yet clean water is precursor to economic growth in developing economies, not just for human life but for
energy generation and
agriculture, among
other uses.
“It's actually a scarce commodity,” said Ms. Bartels, who is chief investment officer of portfolio solutions for U.S. wealth management at Merrill Lynch, citing
figures from the World Health Organization and Unicef suggesting that 2.5 billion people lack access to proper sanitation. “It is an investable theme, but it's not just about buying the underlying commodity — water — it's about buying companies that clean the water, that build the infrastructure.”
Commodities have, broadly speaking, disappointed advisers and investors. Broad-basket commodities mutual funds bled 21% over the year ended Feb. 28 while precious metals funds slipped by 12% over that same period, according to Lipper. Those categories posted dismal returns over three and five years as well.
But Merrill's emphasis on water, which it
first presented as a long-term investing idea in 2013, isn't just — or even primarily — about returns.
The theme can also be used as a way to bring clients' portfolios in line with values of environmental sustainability or social equity.
True, scarce as it may be, advisers can't directly invest in clean water. Generally, investing in water means allocating to the companies that clean, pump, pipe and filter it. But investors have increasingly more options from hedge funds to ETFs to unit investment trusts with baskets of water-related stocks, as Ms. Bartels' firm offers.
Among the ETF options are the PowerShares Water Resources (PHO), Guggenheim S&P Global Water (CGW) and the PowerShares Global Water (PIO). Together the funds manage more than $1.5 billion.
Some of the companies in the space enjoy regulatory advantages that allow them to control their markets and pass price increases through to their customers. And they might be able to take advantage of growth in emerging markets and water scarcity in an
increasingly parched western United States.
“For China to grow their economy, they have to produce more clean water,” said David Richardson, head of U.S. business development for Impax Asset Management, which runs a $1.8 billion private water strategy as well as the Pax World Global Environmental Markets Fund (PXEAX). “It's cold, red-blooded capitalism.”
That said, investors may have to wait for those long-term benefits to come to fruition.
PHO, CGW and PIO all trailed the MSCI World Index's 5% return last year; just one, CGW, exceeded the index's 11.4% return over five years.
While some advisers are more interested in
impact investing than others — Merrill didn't provide hard numbers on how popular its strategies have been with financial advisers — large brokerages such as Merrill Lynch are putting increasing force behind their push to grow their “impact investing” product suite.
“The majority of our financial advisers are very familiar with impact investing,” said Ms. Bartels. “The challenge becomes: Is your client interested?”
