Williamstown, MA, June 07, 2008 --(PR.com
)-- On Thursday June 5, 2008 Donald R. Dion, Jr., publisher of the family of Fidelity Independent Adviser Newsletters, www.fidelityadviser.com, and portfolio manager of Dion Money Management, www.dionmm.com, announced that PHO was now ranked 13th, up from 16th last week, on the PowerShares Momentum Tracker Table.
It may seem as though the global economy runs on oil, but another commodity may be just as essential: water. Water is needed to sustain all life on Earth, of course—but it also plays an overlooked role as an essential ingredient for countless industries. To make a ton of steel, for example, 62,000 gallons of water are needed, and producing one barrel of crude oil uses about 1,800 gallons. Considering the enormous amount of water used for agriculture (70% of the world’s supply), and the increasing scarcity of clean water in the face of rising populations—it makes sense to look to the water industry for investment opportunities.
PowerShares Dynamic Water Resources is one of the few funds to do just that. PHO tracks the Palisades Water Index, which includes shares of water utilities, wastewater treatment companies, and other firms that offer water-related services and products. That leaves the fund open to stocks of a surprisingly broad array of companies, from small start-ups that manufacture innovative water filtration devices to large companies who bring in a very small percentage of their revenue from working on water projects within their infrastructure divisions.
PowerShares launched PHO in December 2005 as the first fund to offer a pure play on water. Investors quickly jumped on board, ballooning the fund’s assets to more than $1.3 billion in about a year. Recently, the fund’s total assets amounted to more than $2.45 billion, far more than most of PowerShares’ single-sector funds can boast. The popularity of the fund could be a sign that its focus on an often-neglected commodity makes sense. But not everyone thinks so. Morningstar analyst Haywood Kelly calls the index PHO tracks “pure gimmickry” and argues that lumping such a diverse group of companies together “results in one hodgepodge
of a portfolio.”
Kelly may be right about much of PHO’s appeal being based on the easily marketable idea that companies should be able to profit by trafficking in the most basic of essential commodities. However, PHO doesn’t behave anything like a typical commodities fund. Commodities funds ordinarily move in concert with the value of the commodity they track, but there currently is no market for trading water, and no other way to accurately gauge the current value of the resource.
So rather than looking at this fund as a direct stake in water, it might make more sense to think of PHO as an infrastructure fund with a water focus. PHO invests in stocks from several different sectors, but the majority of its holdings are in some way involved in the construction, maintenance and operation of water-related infrastructure.
Most of the investors and analysts who are enthusiastic about investing in PHO’s stock portfolio are looking well into the future, taking into account the prospect of major environmental crises over the coming decades and the explosive growth in the population and economies of such countries as China and India. While these factors may eventually cause water-related stocks to rally, in the near term there are some signs that the water industry could be in for a dry spell. About 40% of water consumption in the United States is from industrial applications, and if economic growth continues to drag, PHO’s holdings may follow suit.
To keep up the pace of the fund’s first few years, PHO’s holdings will need to perform strongly. After gaining more than 22% in 2006 and almost 17% in 2007, the fund was up 5.1% in the first months of this year (as of 5/31). That’s the highest PHO has reached since early January. If the global economy remains strong enough to support major infrastructure projects and if water shortages in various regions of the world become more severe, PHO may receive the boost it needs to shoot further up the table.
Year NAV Return (%) +/- Categ.* Return
YTD** 5.10 -8.38
2007 17.23 -15.54
2006 22.32 +0.55
*Category: Natural Resources
Top Ten Holdings*
Tetra Tech 5.29%
AECOM Technology 5.07%
Valmont Industries 5.06%
Agilent Technologies 4.51%
Veolia Environnement 3.86%
Ameron International 3.46%
*As of 6/04/08
Don Dion is the publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors Don’s commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. He is also president and founder of Dion Money Management. (dionmm.com)