David J. Williams is a former Navy pilot. He has the stomach for flying close to the edge. The fund he comanages, Excelsior Value & Restructuring, invests mostly in companies trying to avoid a nosedive into oblivion.

Williams’ fund, one of the Excelsior funds advised by U.S. Trust, has 60% of its holdings in firms that are restructuring their balance sheets, selling divisions, laying off employees and the like. Another 20% are likely acquisition targets in consolidating industries. The rest are stocks that just look cheap.

In the ten-plus years since its founding, this no-load fund has grown to $1.6 billion in assets. Of late, performance has been fair: For the 12 months through June it gained 2%, against a 0.3% advance for the S&P 500. Williams admits he cleaned house in 2002, hitting the eject button on stocks like energy traders Calpine and Dynegy. “I had too much crap in the portfolio,” he confesses.

Nevertheless, the fund has a 15% annualized return over the past decade versus 10% for the S&P. FORBES grades it B for long-term performance in both up and down markets.

Williams, 61, got his start in the business at the tail end of the 1973-74 crash, joining T. Rowe Price as a portfolio manager following a post-Navy M.B.A. from Harvard. In 1987, when an ascendant Japan Inc. appeared to be eclipsing America as the world’s economic superpower, he signed on with U.S. Trust (now a subsidiary of Charles Schwab & Co.). There he concluded that American business would be forced to restructure in order to stay competitive in the global economy. This spurred the launch of Williams’ fund at the end of 1992.

One of its first bets was on a beaten-up IBM , then cutting deeply into its work force and posting breathtaking net losses: $6.9 billion in 1992 and $8 billion the year after. On a split-adjusted basis, IBM’s stock traded in the low teens, half its level five years prior. Williams bought. By July 1999 IBM shares were changing hands at $139. Williams has reduced his position in IBM since then but still owns it, along with a handful of other tech outfits. “The fundamentals really haven’t changed much for the better yet,” he muses, but “when they do, those stocks are going to fly.”

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You don’t have to look far to find statistics suggesting the United States’ water and sewage systems are in sorry shape. At the homepage of the Environmental Protection Agency’s Office of Water, for example, a report suggests the current pace of spending on drinking-water infrastructure falls $263 billion short of what’s needed over the next two decades.

Those kinds of numbers haven’t been lost on Congress, or, for that matter, stock investors who have taken a strong interest in companies working in the water business. Many of the stocks on the table below trade within a stone’s throw of their 52-week highs and carry price-to-earnings ratios above their five-year averages.

Among water sector winners: investor-owned water utilities. These include outfits like Philadelphia Suburban and SJW . The former company, the largest of its kind in the U.S., provides water and wastewater services to two million customers in Pennsylvania, Ohio, Illinois, New Jersey, Maine and North Carolina. SJW owns San Jose Water, a utility supplying drinking water to a million people in Silicon Valley.

So why would Wall Street get so worked up about boring old water utilities? Mergers and acquisitions, for one. Not only has there been heavy consolidation among domestic players, but big foreign companies like France’s Veolia Environnement and Germany’s RWE AG have also gotten involved, paying significant premiums to buy U.S. utilities.

Another plus: The water utility business could well benefit from the outsourcing trend now evident in other government areas like defense and information technology. “The United States is probably the most attractive market from a privatization point of view,” says Phillipe Rohner, who co-manages the Pictet Global Water Fund, a portfolio devoted to companies in the water business.

Rohner notes that U.S. water utilities going private have the advantage of “the most advanced capital markets in the world” when it comes time to raise the funds necessary for infrastructure improvements.

But the National Association of Water Companies (NAWC), the industry group representing investor-owned utilities, complains U.S. policy still gives public utilities an edge. In a position paper, the group says that private water companies still “operate under numerous competitive disadvantages which include payment of federal, state and local taxes, and limited access to tax-exempt financing.”

Full story at Forbes.com