10 Questions With Pictet Global Water Fund's Philip Rohmer

Here's a fund that gives new meaning to the term "fund flows." (We couldn't resist.) The Swiss Pictet Funds launched its (PGWIX)Global Water fund in January 2002, two years after its European counterpart. The fund invests solely in companies that in some way manage, purify, distribute, bottle or otherwise treat water.

That's right: Water. It doesn't get much more niche than this, folks. And while the fund, whose "liquid assets" include holdings in Vivendi and Waste Management, lacks peers to make any relevant comparisons, it's safe to say that performance hasn't been stellar. The U.S. fund (an exact replica of the slightly more established European fund) is down 28.2% year-to-date -- which is also since inception. The European fund was down a mere 4.5% for 2001, but is down 10.4% since inception nearly three years ago.

Nonetheless, the topic is intriguing -- despite whether the investment concept is a little more than amusing. So we talked with Philip Rohner, who co-manages the fund with Hans Peter Porter. Read on to find out which water-based investments are boiling, how the industry will grow and what the French know that the rest of us don't.

1. Why water?

Our bank was looking at various segments of the market for promising themes. Water was an investment theme that showed great promise in the mid- to long-term, but there weren't any vehicles that allowed investors to focus on this area.

2. Aren't most institutions responsible for water infrastructure and management in the public sector?

That's true. Even worldwide, there's an old understanding between the public and the government that water is viewed as a public good -- and in many cases, a free good.

There's a trend, though, across many countries. As the need for more and better infrastructure to provide quality water increases, countries and municipalities are determining whether the capital investment comes from the public or private sector. And more are turning to the private sector.

3. You have 24% of your assets in French companies. What do they know about water treatment?

France has a very different view than the rest of the world regarding water -- and that goes back to Napoleon. Water management has been privatized for a long time there, with old companies like Vivendi Environment and Suez Lyon Eaux involved in water management. [Vivendi Universal owns roughly 40% of Vivendi Environment, recently down from 60%.]

Water is generally considered to be a free good. But it's not, it's an economic good -- somebody has to pay for it ultimately. The French understand that and have long had companies that efficiently and profitably manage water.

4. So what's the universe of companies you're choosing from?

Currently, there are almost 200 companies worldwide that we would categorize as water companies -- not necessarily utilities, but also other management, purification, distribution companies and the like. But some of them are not liquid enough for us to invest in, others are tiny or otherwise unattractive from a valuation standpoint. We screen out all but 50 or 60 of them.

5. And what exactly do these companies do?

There are basically two ways to handle the issue of water -- municipalities can either sell the assets (such as water treatment plants, utilities and the like) to companies that will then own and manage the assets, or the municipality can keep the assets, but contract out the management. We prefer investing in companies that use the latter model, the service model. The French use the service model, and that's what's primarily being exported to the rest of the world.

With the service model, there's no capital investment. The company gets a guaranteed revenue stream as long as it meets certain goals.

6. What's in it for the municipality?

They retain control of the assets, which is politically important in most cases. But outsourcing the management means that each municipality doesn't have to reinvent the wheel in terms of management or financing (which usually comes from taxes). A company like Vivendi has huge economies of scale, knows how to manage and to make money doing so.

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7. How do you slice up the sector, and is there a sub-sector you particularly like?

There are many categories -- municipalities, the utilities they work with, commercial industrial companies that own or just manage assets, equipment manufacturers, consumer goods companies (for products like bottled water), and waste management companies.

We like the high-end equipment manufacturers. We're not talking about valves and pipes; these companies are creating and using things like ultraviolet technology, which eliminates pathogens and purifies the water.

These companies will see demand from all areas -- municipalities, the companies they contract out to, even other industries that require pure water, like chip makers.

8. Doesn't your focus on high-end equipment manufacturers make this just a highly specialized tech fund?

No, that would imply higher growth rates, which we can't see in this area. Also, what is considered high-tech in the water industry is probably considered low-tech in other areas. We're talking about the renewal of infrastructure throughout the world.

9. Virtually all of your assets are in U.S. or European countries. What's the global outlook for privatization?

Growth will be much faster in the developed world. Today, Western Europe's water management is almost 40% privatized, in the U.S. it's 15%. By 2015, we think Europe will reach 75% privatization, and the U.S. 65%. So there's huge growth there. But Latin and South America, for instance, which is currently 16% privatized, probably won't go past 25% in the same amount of time. Western companies will need greater incentive before they go into the developing world.

10. Your fund is new and performance has been abysmal. What should investors expect?

We're talking about markets that are growing 6% to 8% a year. This isn't an Internet boom. But markets in the developed world -- particularly for equipment manufacturers -- will grow much faster than GDP.

Also, we decided to base our investments on the management or service model. To our recent detriment, water utilities have actually done very well of late because they're seen as defensive. But that market isn't going to grow. The growth companies we chose, unfortunately, faced other unrelated issues. Vivendi Universal, for instance, needed cash quickly and dumped a huge amount of shares in the midst of a bear market. That hurts, and it had nothing to do with how the company is performing -- but it did hurt our fund since it's our second-largest holding.

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