Criterion Investments Ltd. of Toronto has launched Canada’s first fund that invests in water, an increasingly valuable resource commodity that some analysts call the “oil of the future.”

Criterion, a unit of VenGrowth Asset Management Inc. , the Tor-onto-based labour-sponsored investment fund firm, is marketing the new vehicle — Criterion Water Infrastructure Fund — as a globally invested, yield-producing investment suitable for a slice of any client’s portfolio. It has hired Geneva-based Pictet Asset Management SA as subadvisor for the fund, with a mandate to invest in a broad range of water-related companies.

Criterion stops short of calling the fund a socially responsible investment, but says environmental awareness is a factor in the development of the fund.

“There [has] been a lot of focus on climate change and the environment, which I’ll call one of the four drivers of the fund’s growth story,” says Ian McPherson, president of Criterion, who spearheaded the move to bring the fund to Canada.

McPherson, who had been mulling over the idea of a water fund for a few years, sought out Pictet because of its six-year track record in the field. The firm manages a $5.2-billion European version of the fund, which was launched in 2000.

In addition to clients’ environmental concerns, McPherson says, three other factors should boost stocks held by the fund:

> Supply And Demand. The global population is growing exponentially but the water supply is finite. Many countries and regions are in “water stress” today, says McPherson.

> Aging Infrastructure. Pipes and reservoirs manufactured and installed decades ago in most western nations are in need of renewal or replacement. Pictet estimates the costs of infrastructure will reach $1 trillion globally in the next five years.

“Any time there is a $1-trillion capital expense, profits are going to be made,” says McPherson.

> Health Concerns. Sanitation and water purification are among the United Nations’ greatest concerns.

The fund, which uses the Morgan Stanley Capital International world index as its benchmark, obviously has no track record in Canada. However, Pictet says, the European version has added 6.8% on an annualized basis since its inception in 2000, compared with an annualized loss of 1.3% for the index over the same period.

The holdings of the Canadian fund will mirror those of its Con-tinental cousin. The European version maintains a portfolio of about 80 stocks globally, across all capitalizations, although the majority are blue-chips. The top 10 holdings reflect the fund’s growth drivers. Veolia Environnement SA of France, at 7.1% of assets under management, supplies water to about 110 million people and also recycles trash. Veolia’s CEO said last summer in an earnings report that the firm wants to supply and treat water for 50 million people in China by 2010.

ITT Corp., a U.S. defence contractor that also produces industrial pumps, systems and services to measure and control water and other fluids, is the second-largest holding, at 5.5.%.

Other top 10 holdings include French companies Groupe Danone SA, which bottles water under the Evian brand, and Nestlé SA, the world’s biggest food company — at about 4.5% each. Broad-based utilities with water distribution and treatment business lines, such as Britain-based United Utilities PLC and Severn Trent PLC and France’s Suez SA, are also in the top 10.

“A clever manufacturer sees a niche that could be useful for certain clients,” says Eric Kirzner, professor of finance and the John H. Watson chair in value investing at the Rotman School of Management at the University of Toronto.

“Water is a hot, new investment segment, so selling it to clients who like investing in new, innovative ideas will probably be easy,” says Dan Hallett, president of Windsor, Ont.-based fund analyst Dan Hallett & Associates Inc.

But Kirzner and Hallett both caution that the fund could be too specialized for many clients. And, like many specialty funds, Criterion’s water fund comes with a high management fee — 2.5%.

Hallett also notes PowerShares Water Resources Portfolio, manufactured by PowerShares Capital Management LLC, based in Wheaton, Ill., is a cheaper alternative. It trades on the American Stock Exchange and tracks the Palisades water index, which is based on U.S. companies involved in the water business. That portfolio holds about 40 stocks, 10 of which are also held in the Criterion fund.

@page_break@Pictet’s Philippe Rohner, co-lead manager of the Criterion fund, says his fund’s broader global mandate makes it a different investment than the passive PowerShares fund. IE