With market volatility making it difficult to know which asset classes to hold in the short-term, fund managers are turning to thematic investments with long-term growth prospects – such as infrastructure and water.

The case for both is strong. A report from the OECD last year said that infrastructure spending needed to be $53,000bn worldwide between now and 2030, as governments in developed countries perform much-needed upgrades to transport systems, and emerging markets industrialise.

And, as population growth gathers pace and emerging markets turn to cleaning up water supplies, prospects for water companies are also looking good.

Steven Goldin, a vice-president in portfolio services at Standard & Poor’s, says: “What infrastructure and water have in common is that both participate in global growth and an underlying demand for natural resources. I think they’re both long-term very solid defensive plays – these are long-term assets generating lots of cash flow so are very stable from that perspective.”

Privatisation is a big theme in both infrastructure and water. Water privatisation is expected to take off as tariffs rise and it becomes more cost effective for private companies to get involved.

Hans Peter Portner, manager of the Pictet Water Fund, says that only 10 per cent of the world’s population is served by the private sector. This is because the average global water price is currently less than the “whole cost recovery” price.

But he expects this to even out in the next few years, thanks to pressures on supply as populations, particularly in cities, grow and water becomes scarcer. In Europe, 34 per cent of the population is served by the private sector, but Portner predicts this will rise to 54 per cent by 2015.

However, Portner says he steers away from investment in emerging markets, as water tariffs tend to remain subsidised, meaning there is little opportunity for private companies to make a profit.

Neil Jones, division director at Macquarie, sees US infrastructure as a key area. “They have to take action or they’ll end up with an infrastructure that is comparable to emerging economies, not an economic superpower,” he says. “The only way they can solve that dilemma is to bring more private capital into infrastructure assets.”

This has already been happening – in May this year, a consortium led by Abertis of Spain took out the most expensive toll-road lease ever, for $12.8bn on the Pennsylvania Turnpike. And Jones predicts that the Chicago Midway Airport could go private by the end of this year, making it the first airport in the US to be privatised.

Both infrastructure and water are seen as non-cyclical investments, offering diversification in a portfolio. Goldin points out that because infrastructure is a thematic investment – covering transport, utilities and energy as well as different areas of the world – it can add diversification.

Water is seen as both a hedge against inflation – tariffs rise in response to increasing prices – but also as a more secure investment during an economic slump. While consumers can forgo retail goods, water remains a necessity.

“I think the water sector has structural growth opportunities that are not linked into cyclical exposure of economies,” says Tim Dieppe, manager of Henderson’s Industries of the Future fund. “Governments cannot afford not to have water for their people and crops, so they will always make sure that investment is happening.”

The Henderson fund offers exposure to water through companies that are making the use of water more efficient, such as those involved in desalination or irrigation – for example, Jain Irrigation Systems in India. “The real scope for saving water is actually in irrigation,” says Dieppe. “Hardly any of the water in the US is effectively irrigated – they could save 30 per cent of their agricultural water use by doing more efficient irrigation.”

‘Packaged’ water is another way to invest, through companies such as Nestlé and Danone – Portner makes the point that, measure for measure, packaged water is a premium product, and costs more than oil.

However, there are still relatively few funds investing in infrastructure. Goldin suggests this is because they are thematic, cutting across sectors, which tends not to be the focus of an active fund manager who is seeking to add alpha.

But Jones argues that when picking an infrastructure index there is a danger of commodity risk through exposure to utility companies. The Macquarie fund avoids this, focusing on low-risk predictable assets.

Another risk in infrastructure is political and regulatory, for example operating in emerging markets where deals could fall through.

The Macquarie fund gets around this by avoiding assets in the construction phase, which are more exposed to the risk of rising material prices, and generally investing in the developed world.

But while rising oil and gas prices have damaged utilities in the short term, Portner says: “They will push up tariffs eventually. It’s bad news for clients but not for investors.”

In fact, utility companies in England and Wales last month told Ofwat that water bills for the next five years would have to rise, while Thames Water said it needed to spend £6.5bn between 2010 and 2015 on improvement works.

So investors can expect fairly stable, if not exciting, returns from water. Portner predicts long-term average returns of 8 per cent a year comprised of 6 per cent market growth and 2 per cent dividend yields.

Goldin says: “With water, given the trends of population growth and the industrialisation of third world countries, I don’t think there is much risk for the investor that water investments will be hurt. The worst thing that could happen would be the timing of their investment.”