PHO ranks in PowerShares Momentum Tracker’s Top 20 Sector Momentum funds for 4th consecutive week

June 13, 2008 - PRLog -- 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. Building a car takes about 39,000 gallons; manufacturing a semiconductor uses about 3,000 gallons; and producing one barrel of crude oil uses about 1,800 gallons. And considering the enormous amount of water used for agriculture (70% of the world’s supply), the fact that 90% of the world’s diseases are water-related, 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 such giants as General Electric, which brings in a very small percentage of its revenues from working on water projects within its infrastructure division.

That said, Morningstar recently classified more than 80% of PHO’s holdings as mid-cap or smaller, reflecting a heavy bias toward smaller firms that make the bulk of their profits from water-related business. Altogether, the fund’s recent 35 holdings had an average market cap of about $3.3 billion. And though the fund is geared for a global take on the water industry, only 8.6% of its assets were recently invested in foreign stocks.

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: When gold prices rise, a gold fund will perform well. 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. Recent top holding URS, for example, is a major U.S. government contractor that engineers and constructs power plants, military facilities and a wide range of other infrastructure, including wastewater treatment plants. Like many of PHO’s holdings, it’s a bit of a stretch to call URS a water stock, though a small portion of its profits may be tied loosely to demand for the resource.

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. A February survey of water industry professionals, conducted by market research firm ChangeWave, found a 14% decline from a year earlier in the number of respondents who felt spending on water projects would increase over the following 12 months. Still, 64% of respondents said they thought spending would increase, leaving significant room for optimism.

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). The fund ranks 13th on the PowerShares Momentum Tracker Table  this week, its fourth week in the Top 20.  (http://www.fidelityadviser.com/readMe_PS.asp)  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. But this fund’s tight focus on an unusual mix of stocks—many of which are quite small—could make for unpredictable and volatile performance regardless of the demand for water.


Performance
Year   NAV Return (%)   +/- Categ.* Return
YTD**  5.10     -8.38
2007  17.23     -15.54
2006  22.32     +0.55
*Category: Natural Resources
**Through 5/31/08
Source: Morningstar

Top Ten Holdings*
URS               5.57%     
Tetra Tech          5.29%    
AECOM Technology                          5.07%
Valmont Industries    5.06%    
Agilent Technologies                           4.51%
Lindsay                          3.88%
Veolia Environnement                         3.86%    
Danaher         3.78%    
Itron            3.74%    
Ameron International                3.46%
*As of 6/04/08

Fidelity Independent Adviser PowerShares Momentum Tracker (http://www.fidelityadviser.com/readMe_PS.asp)  is a weekly newsletter published by Fidelity Independent Adviser Newsletter. (http://www.fidelityadviser.com/)

About the Author:

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. With more than 100,000 subscribers in the United States and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.

Mr. Dion is also president and founder of Dion Money Management, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Massachusetts, Dion Money Management manages more than $850 million in assets for clients in 49 states and 11 countries. A licensed attorney in Massachusetts and Maine, Mr. Dion has more than 25 years’ experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

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Fidelity Independent Adviser is a family of newsletters, that provides to a broad range of investors Don Dion’s commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the United States and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. http://www.fidelityadviser.com/