Mention the thought of investing in rubbish collection to some people
and they may yawn and walk away 鈥� but not if they are working on Wall Street.
American stockbrokers are urging their clients to recognise the potential
of environmental services and to buy shares in companies involved in this
kind of work.
Since November 1988, financiers in the US have formed 12 investment
funds with portfolios of stock in environmental service companies. Together,
the funds are now worth more than $500 million (about Pounds 250 million).
According to stockmarket analysts, this is a remarkable commitment to a
new and specialised field. Such an investment surge, they say, reflects
the expectations of brokers and investors that the environmental services
industry will grow faster than many other areas of the economy in the 1990s.
The scope of the industry is broad. It includes water treatment, disposal
of solid and hazardous waste, recycling, environmental consultation and
engineering, and the manufacture of pollution control equipment. By the
mid-1990s, spending on environmental equipment and services in the US could
be approaching $200 billion a year, say financial analysts. The comparable
figure for 1989 was $56 billion, according to estimates by Alex, Brown and
Sons, a firm of brokers based in Baltimore. The US government has estimated
that the country鈥檚 new clean air legislation alone could cost $25 billion
to implement by the year 2000.
Advertisement
But with few exceptions , establishing environmental investment funds
has had little to do with a commitment to 鈥榞reen鈥� issues. The main attraction
is the chance to make money and this is the theme ballyhooed by most companies
that market the funds.
Investment funds, along with most other types of financial holdings,
have suffered from the downturn in the world鈥檚 stock markets triggered by
Iraq鈥檚 invasion of Kuwait. But this crisis is not altering the forecasts
of investment fund managers or stockbrokers.
鈥極ver the long term 鈥� the next 10 years 鈥� it is going to be one area
that will perform very well,鈥� says Frank Korth, the manager of the $58 million
Kemper Environmental Services Fund, and the senior vice-president of Kemper
Financial Services. In Europe, and especially in the US, Korth expects rates
of return from environmental funds to compare with those from health funds,
which since the 1960s have been between 15 and 25 per cent annually.
It is forecasts like these that have spurred the creation of the environmental
investment funds in the form of mutual and closed-end funds, unit trusts
and limited partnership . Two of the biggest funds are operated by Merrill
Lynch, which set up its first Environmental Technology Trust in July 1989.
Investors promptly bought up the fund鈥檚 stock for $126 million. Merrill
Lynch launched a second Environmental Technology Trust just a few months
later, attracting another $70 million.
Investment decisions by most fund managers are based chiefly on the
earnings potential of the companies providing environmental services. As
a result, fund portfolios largely consist of holdings in established enterprises
with well-defined products and markets (see Table).
To limit their financial risk, most funds restrict investment in any
one concern to a maximum of 5 per cent of a portfolio鈥檚 assets. Some are
even more conservative. Oppenheimer Fund Management鈥檚 Global Environment
Fund, for example, holds investment in companies to about 1.5 per cent.
鈥楽o many of these are young companies that can have hiccups in their progress,鈥�
says Donovan McKercher, manager of the $46 million Oppenheimer portfolio.
Most managers of environmental funds do not act as venture capitalists;
they will not invest in new companies with unproven products, or in areas
that still entail intensive research, such as biotechnology. Mutual funds
and unit trusts do invest in companies with emerging technologies and services
but only when it is clear that there are no more technical hurdles to clear.
For example, they have invested in Wellman, a manufacturer of fibre that
uses recycled plastics as a prime source of raw material; Pacific Nuclear,
a nuclear waste consulting firm; and Applied Bioscience International, a
biotechnology company that provides a range of toxicological testing services.
The core holdings of most fund portfolios, however, are often concentrated
in companies involved in waste disposal and water treatment because revenues
from these services are regarded as 鈥榲ery predictable鈥�. Unlike environmental
engineering companies, which can be relatively sensitive to economic swings,
waste disposal and water treatment are services that few people can do without,
says Andrew Groshans, the manager of an SFT environmental fund.
At least four environmental funds are taking another tack to protect
themselves against economic downturn 鈥� and to maximise their profits. They
diversify and invest in non-American companies, particularly European firms
working in the environmental services area. 鈥楾he (environmental) problems
in Europe are, if anything, worse than they are in the United States,鈥� says
McKercher, who manages Oppenheimer鈥檚 Global Environment Fund. Around 18
per cent of the fund鈥檚 assets are invested in European waste disposal and
water treatment firms, such as Attwoods of the UK and SITA of France. 鈥楾he
general movement toward a cleaner environment in Europe is here to stay,鈥�
he says.
The $54 million Freedom Environmental Fund, a division of the John Hancock
Corporation, has 29 per cent of its funds invested in non-American companies
鈥� mostly in Europe. Among its favourites are Switzerland鈥檚 Thermo Electron,
a combustion technology company; Norit, a Dutch supplier of activated carbon
for filtering air and water; and the Republic of Ireland鈥檚 Powerscreen International,
a manufacturer of equipment for handling municipal waste and sewage sludge.
Diversified holdings in environmental services in Europe, the US and
elsewhere, however, do not provide enough security for some managers of
American environmental funds. To buffer their portfolios against hard times,
these managers have moved away from the environmental services field altogether
and invested in companies working in the energy field. They have chosen
firms involved in natural gas supply, electricity generation projects and
coal mining (low-sulphur coal).
Despite the efforts of their managers, environmental funds are not more
immune to the whims of the stock market than other types of funds. Even
before Saddam Hussein marched his troops into Kuwait on 2 August 1990, the
values of environment funds had begun to fall along with the stock market
prices of companies working in the environmental sector. According to financial
analysts, speculation forced up the share prices of companies working in
environmental services to unrealistic levels, so the prices had further
to fall when the mood changed.
In the case of Fidelity Investments鈥� Select Environmental Services portfolio,
the value of a share in the fund peaked at $13.55 in mid-July, but had slipped
to $12.78 within two weeks. On 19 October, 10 weeks after the invasion of
Kuwait, its value had fallen to $10.46 鈥� just 4 per cent more than the initial
asking price in June 1989. A number of environmental funds were hit even
harder and things could get worse, says analysts.
The downturn in stock market prices of individual stocks and shares
in environmental funds will not adversely affect the companies that make
up the portfolios, says John Earhart, chairman of GEF Management鈥檚 $5 million
Global Environment Fund. He describes the fall as a stock market correction
rather than as a reflection of the earnings of individual companies. Nevertheless,
companies wishing to raise capital by offering new holdings of stock may
find people reluctant to invest in them while their stock market prices
are low.
Such caution is endorsed by Douglas Augenthaler, a senior vice-president
of Oppenheimer, a financial services company (not affiliated with Oppenheimer
Fund Management). He says that investors should be very wary of the environmental
sector at this time. In his view, investors might do better focusing on
individual stocks rather than dabbling in investment funds. There are some
individual companies which will perform well and see their stock prices
appreciate, he asserts.
Fund managers and stock analysts, however, remain convinced there will
be big rewards for investors willing to weather the stormy economic periods.
According to Stephen Schweich, an analyst with Alex, Brown & sons of
Baltimore, the growing scarcity of approved solid-waste disposal sites will
enable some companies in this field to increase considerably the rate they
charge for disposing of rubbish. This situation, he says, should help boost
the recycling of metals, paper, plastics and glass. Mandated federal cleanup
actions involving hazardous wastes, asbestos, leaking underground storage
tanks, and other activities will also go ahead.
According to Glenn Cutler, manager of Schield Management鈥檚 Progressive
Environmental Fund, 鈥榥o one is going to stand up in Congress and make a
serious attempt to reduce the level of spending at the Environmental Protection
Agency.鈥� He is adamant about the bright prospects for business: 鈥榃e are
in the early stages of a major growth industry. It鈥檚 not a fad.鈥�
* * *
1 Funds with commitment .. and little popular support
Not all managers of environmental funds base their investment decisions
solely on a company鈥檚 potential for making money. Those responsible for
Merrill Lynch鈥檚 Ecological Trust, Schield Securities鈥� Progressive Environmental
Fund and GEF Management鈥檚 Global Environment Fund also consider other factors
such as a company鈥檚 track record.
These three funds are committed to investing only in firms in the environmental
sector that have a good record of complying with the rules of the US Environmental
Protection Agency and are deemed to conduct their businesses in an environmentally
responsible way.
This has meant, for example, that the two giants of the waste disposal
industry, Waste Management and Browning-Ferris Industries, are consipicuously
absent from the portfolios of the three funds even though these companies
are expected to do well commercially in the 1990s.
Merrill Lynch and Schield chose not to include these companies on the
recommendations of Progressive Asset Management, a firm based in California
that performs social and environmental screening for business clients. Both
waste disposal companies were judged unfit for inclusion because of a history
of pushing environmental laws to the limit, being fined for water and air
pollution, and facing multiple charges of price fixing.
Such environmental commitment has not proved popular with investors,
however. The three funds together are worth just $15 million 鈥� less than
3 per cent of the value of all environmental investment funds in the US.
One reason for this lack of support may be that there is often little
difference between what environment funds invest in, whether or not they
screen the companies in their portfolios. Schield鈥檚 Progressive Environment
Fund, for example, states that it will consider taking holdings in virtually
all aspects of the industry, including such controversial activities as
landfills, incineration and hazardous waste disposal.
According to Jeffrey Leonard, president of GEF Management鈥檚 Global Environment
Fund, 鈥業t is a complicated business and it becomes a very subjective thing.
What one group screens out could be perfectly acceptable to another.鈥� Leonard
accepts that screening does not guarantee a good financial performance:
鈥楾hat is one of the major reasons why there is not more public clamouring
for it.鈥�
David Beckwith, manager of the Freedom Environment Fund, questions the
value of the screens. In terms of their overall contribution to cleaning
up the environment, 鈥榗ompanies involved in environmental services in a major
way are constructive.鈥� He has no qualms about investing in companies whose
activities are monitored by the EPA. Such close scrutiny reduces the investment
risk, he says.
Nevertheless, the environmentally committed managers seen convinced
that their funds have a future. According to Glenn Cutler, manager of Schield鈥檚
$2.4 million fund, 鈥榯here are many people who want to know that they are
buying into companies that are not big polluters.鈥�
* * *
2 Coming to terms with the financial market
Two types of organisation market and manager environmental investment
funds in the US. These are the stockbroking frims, which specialise in buying
and selling shares in public companies, and the financial services companies,
which also offer other kinds of financial advice. Both types are regulated
by the Securities Exchange Commission and neither has an inherent advantage
over the other when it comes to fund management.
There are four main types of environmental investment fund. The most
common is a 鈥榤utual鈥� fund. This is a portfolio of stock containing blocks
of shares in many different companies, short-term, interest-bearing securities
and cash. The holdings in an environmental mutual fund are 鈥榗losely managed.鈥�
Companies can be dropped from the portfolio in favour of others considered
to be more stable or likely to yield higher profits, so the price of whose
stock will rise. (The value of a share in the mutual fund is determined
by the performance of individual stocks within the overall portfolio).
Investors in a mutual fund can buy and sell shares in this environmental
portfolio in much the same way as they would acquire stock in an individual
company. The main difference is that all transactions must go through the
fund manager, who remains the ultimate buyer and seller of shares in the
fund.
鈥楥losed-end鈥� investment funds are different from mutual funds in that
their managers are not involved in the trading of shares in the fund after
they have sold them to investors. Instead, the shares are traded on the
stock market by individual investors themselves. One advantage of this type
of fund is that managers need not sell off attractive holdings to meet the
demands of individual investors eager to dispose of large blocks of shares
鈥� an action that may at times undermine earnings for other shareholders.
Investors in a 鈥榰nit trust鈥� in the US, on the other hand, commit their
funds for five years, knowing in advance the companies that the fund may
invest in. Unit trust managers do not try to optimise returns on a day-to-day
basis, as the managers of mutual funds do; they intervene to alter the mix
of holdings in the portfolio only when there is significant deterioration
in the performance of a company. This means that the management fees for
a unit trust are often lower because the portfolio is largely fixed and
fewer charges are incurred for trading stocks.
Only one environmental investment fund in the US operates as a 鈥榣imited
partnership,鈥� in which the number of investors is strictly limited. A limt
of 100 partners with a minimum investment of $20,000 apiece characterises
the Gobal Environment Fund, based in California, which is aimed at the long-term
investor. (Many mutual funds, in contrast, will accept an initial deposit
of $1,000.) Management and transaction fees of limited partnerships are
low, but investors in them must provide 90 days鈥� written notice before they
can withdraw their funds.
鈥斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌�
Funds favour established firms with well-defined markets 鈥斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌�
Waste Management Solid waste collection, waste disposal
鈥斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌�
Emcon Associates Environmental engines 鈥斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌�
Wheelabrator Technologies Fossil fuel and waste combustion; and
water treatment 鈥斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌�
Air & Water Technologies Air/water pollution control and
treatment 鈥斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌�
Horsehead Industries Industrial air pollution control 鈥斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌�
Handrex Environmental Recovery Underground storage tank replacement
and mangement 鈥斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌�
Chemical Waste Management Toxic waste disposal, cleanup and management
鈥斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌�
ERC Environment & Energy Services Consultant/engineers 鈥斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌�
Martech USA Oil spill cleanup 鈥斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌�
TETRA Technologies Decontamination of water supplies and
soils 鈥斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌斺赌�
Mark Crawford is a freelance journalist based in Washington.