Water funds on the rise

* Turbulent markets drive investor interest in water

* Water returns in emerging economies as high as 20 pct

* Pension funds, wealth funds snap up UK water deals

By Martin de Sa'Pinto and Raji Menon

Oct 10 (Reuters) - Water has yet to live up to its hype asthe commodity bet of the future, but the world's most basicresource is drawing ever more money as asset managers seeksteady inflation-protected returns.

Investment opportunities are increasing as cities in fastergrowing markets expand and as governments in more developedcountries, short of cash, are forced to turn to the privatesector to fund upgrades to meet tougher environmental standards.

Meanwhile, investors such as pension funds want alternativesto rock-bottom bond yields and volatile equity markets.

"There are opportunities in the water space that haven'tbeen seen for decades now that governments have run out ofmoney," said Zurich-based investor Martin Kloeck, whose SigninaCapital recently launched a water fund.

The global business, including drinking and waste water, isthought to be worth about $450 billion a year and is growing atup to 6 percent annually, according to Citigroup.

The assets of funds focused on water and specialist waterfunds nearly doubled from just over $12 billion in 2010 tonearly $24 billion in 2011, according to data from Lipper, aThomson Reuters service. That could reach $50 billion by 2015,industry analysts believe.

Growing urban populations and a lack of government money toupgrade infrastructure are increasing the need for privatesector investment, said Hans-Peter Portner, who runs Swiss bankPictet's $2.9 billion water fund, the world's largest.

"These drivers are solid as rock," he said. PRIVATE MONEY

Private sector investment is likely to account for 30percent of investment in drinking water and waste water by 2016compared to 19 percent now, according to the independent GlobalWater Fund consultancy.

Long term predictions have yet to be borne out that climatechange and swelling cities could mean water takes off as acommodity investment to rival oil, but investing in such a basicneed has an appeal at a time of global uncertainty.

Morningstar data show the top water-focused funds havereturned over 10 percent year-to-date against 6.4 percent forthe MSCI World Index. The iShares global water Exchange TradedFund has returned 17.6 percent.

Many funds invest in water-related stocks, such as treamentcompanies, meter makers and utilities.

"Despite a compelling long term growth case, global watercompanies trade at discounts on earnings and cash flow andprovide a better dividend yield than the broad equity market,"said Patrick Armstrong, chief investment officer at ArmstrongInvestment Managers.

Two of the world's largest water companies, VeoliaEnvironnement and Suez Environnement Co. ,offer dividend yields of 8.4 percent and 7.7 percentrespectively.

Debt financing and more complex deals are also options.

Kloeck's Signina Capital, which recently launched a $450million fund, this year closed a deal involving the City ofOttawa in a contract that pays an annual eight percent.

"There are plenty of deals that we consider sweet spots,"said Kloeck, eyeing those in the $20-$100 million range.

Even bigger returns - and growth rates of up to 20 percent ayear - could come from some emerging market sectors, such asChinese water companies and those dealing with desalination,said Ian Simm of environment-focused Impax Asset Management. Ithopes to double the 220 million pounds ($357 million) of waterassets it has under management within four years.

LIQUIDITY AMONG CONCERNS Not everyone is as bullish.

Schroders invests in water companies through its climatechange fund, but has no dedicated water fund.

"There are few large stocks like utility companies and thena long tail of specialist smaller companies," said RichardStrathers, an equity analyst at Schroders. "The liquidity issuewould also be a concern."

Politics is another worry for long term investments in asector which carries risks of expropriation and where it can behard to pass on price increases for such an essential service.

"We expect more growth in waste water as this market segmentis less politically charged and offers higher margins," Pictet'sPortner said.

Britain's water companies offer exactly the sort ofstability and clear regulation that investors are seeking andthe number of deals shows the growing appetite for the sector.

China Investment Corporation and the BT Pension Scheme bothpicked up stakes in Thames Water this year, while Canadianpension funds CDPQ and CPPIB have acquired stakes in South EastWater and Anglian Water respectively. Fund manager M&G andMorgan Stanley bought a 90 percent stake in French water firmVeolia's British business.

Another advantage of water was that its performance was notlinked as closely to overall economic growth as otherinfrastructure investments, noted Tony Rocker, partner atconsultancy KPMG's infrastructure unit.

"During the financial crisis of 2006-2009, it was the GDPlinked infrastructure assets that didn't perform as well asexpected," he said. "Water did exactly what it said on the tin."

($1=0.6155 British pounds)

(Additional reporting by Laurence Fletcher; Editing by MatthewTostevin)

((raji.menon@thomsonreuters.com)(+44)(0)(207542 3551))