Economist sees liquid assets

Steve Hoffmann wants you to invest in “blue gold,” make a profit and help save mankind in the process.

He’s talking about water, H2O, the oil of the 21st century.

And the 54-year-old resource economist and investment fund manager has written a 303-page primer about just how to do that.

Hoffmann thinks “Planet Water: Investing in the World’s Most Valuable Resource” (John Wiley & Sons, 2009) is every bit as compelling as any business book on the market today.

“The global condition of our water resources has never been in more peril, nor have the investment opportunities ever been greater,” Hoffmann says.

Why?

There is no substitute for pure, life-sustaining water, and it’s getting harder to get by the day, Hoffmann says.

Sure, there’s an abundance of water. That’s why Earth is known as the Blue Planet. But there are serious disconnects: Most water isn’t drinkable or isn’t accessible in sufficient quantities to major population centers.

Some big cities – including Shanghai; Mumbai, India; and Lagos, Nigeria – already face monumental challenges of matching explosive population growth with limited water supply. Droughts, storms and contamination create massive disruptions.

There’s money to be made in fixing all this, Hoffman says.

He wrestled with the idea of profiting from a worldwide predicament but concluded that clean water for all depends on private investment in technology and infrastructure. “It just isn’t going to happen without it,” Hoffmann says.

Kevin Commins, executive editor of John Wiley, agrees. “We felt a book alerting investors to those opportunities would sell well. Steve’s background in the water industry and the investment industry made him an ideal author for the book.”

While sales of “Planet Water” haven’t exactly created a tsunami, Commins says the book is catching on. It was named one of the top investment books of 2009 by Stock Trader’s Almanac.

You see, nobody knows water quite like Hydro Steve.

Hoffmann earned his master’s degree in resource economics with a focus on water from the University of North Texas in 1986. His 25-year career has included everything from academics to private-equity funding.

But most impressively, Hoffmann is the architect of the first water-based exchange-traded fund, which was created in 2005.

ETFs bundle stocks with defined similarities so that investors can be diversified within a category or industry. In this case, his index, Palisades Water Index, is 30 stocks, all traded on U.S. exchanges, including water utility, treatment, infrastructure and resource management companies.

PHO, which is licensed and tracked by Invesco PowerShares, is now a $1.5 billion ETF.

Hoffmann’s second fund, Palisades Global Water Index, with an international slant, was launched by PowerShares in mid-2008 and is now a $500 million ETF.

Together, his indexes bring in several million dollars in annual license fees to Hoffmann’s company, Palisades Water Index Associates LLC in Plano, Texas.

“Ours are considered the benchmarks of the water industry,” he says.

Hoffmann pushes ETFs as a good way for individuals to invest in water.

“It’s the third-largest industry in the world, yet it is extremely fragmented and diverse,” he says. “So it is difficult to identify even a dozen stocks that you could invest in. It makes far more sense to take a market-basket approach.”

Tom Lydon, editor of ETF Trends, a Web site dedicated to ETF news and market trends, agrees with Hoffmann. While Lydon admits to being ETF-biased, he says he has cause: ETFs are highly transparent so you know what you’re getting, he says, and the expenses are much lower than a typical mutual fund. You also get diversity within a sector.

“The profitability aspect is something else,” he says. “One could argue that, ‘Gee, the technology sector is so much more profitable and proven now compared to the water industry and water-related ETFs.’ However, if you feel supply and demand is going to get more attention, you may be a little early, but from a long-term stance, it may make some sense.”

So how have Hoffmann’s water indexes performed?

PHO, a high-flying ETF in the boom times, took a severe hit along with the rest of the market, Hoffmann says, but has recouped about 70 percent of that sell-off. His second index is back nearly 90 percent from its low.

Turns out pushing clean water is a bit like advocating investments in clean energy. There are fluctuations.

So does Hoffmann feel like the T. Boone Pickens of H2O? “I do. I really do,” Hoffmann said. “You have to remember with water, there are no substitutes. Time is a little more of the essence.”