Fund manager Q&A: Building a green, and global, portfolio
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From Times staff writer Edward Silver:
Conditions have changed radically and quickly for green investors, with the credit crisis and market plunge ravaging many environmental stocks and the prospect of game-altering support coming from Washington. To help put it all in perspective, I checked in with Bozena Jankowska, who manages the Allianz RCM Global EcoTrends stock mutual fund. Like its peers, the $90-million-asset fund has had a rough time of it this year, falling about 55% after a stellar 2007. The world-straddling portfolio tries to go where the action is, so the U.S. -- hurrying to catch up to Europe in energy technology -- is well-represented in its holdings. Emphasizing patience amid the setbacks, London-based Jankowska expects resilient companies to be rewarded.
Question: How did you position your portfolio for the U.S. election, if at all, considering that the environmentalists’ choice, Sen. Obama, was favored in the polls?
Answer: Actually, we didn’t position the portfolio in regard to the election. For alternative energy and environmental tech, you have to take into account the broader economic situation. It will be some time to see the effects of what Obama puts into action. Energy policy is one of those but we are a global fund and positioning for changing of the guard there would be taking a short-term view.
Q: Are there positives in the election outcome for the space, from your point of view?
A: Definitely. In the long term, Obama being in the White House is very much a positive. We expect a tightening of the reins with respect to EPA regulations, particularly on coal power plants. He is likely to close loopholes in oil and gas, which is good for alternative energy. He may see alternative energy as a way to create jobs. You know, the U.S. has been a stick-in-the-mud when it comes to supporting alternative energy, so yes, many positives.
Q: Yet he arrives at a difficult time. Where do you go from here as an investor?
A: Mainly, we are being very selective in what we hold. We want the best-positioned companies with the strongest balance sheets and largest market share because they will survive and prosper.
Q: Ah, the shakeout is here. In solar there are certainly too many contenders.
A: It’s here. Financing is scarce and there are many knock-on effects of that. Utilities are pulling back on their capital spending, though not stopping entirely. On the positive side, it weeds out the poor-quality companies. You will see a few strong players in solar, as the consolidation proceeds.
Then we will get down to business bringing down costs, commoditizing solar equipment. There will be help from the policy clarity and commitment to funding by Obama, which will boost these stocks. We may be talking about 12 to 18 months. Now we are focusing on the qualities that make durable companies: market share, financial strength, low-cost production. We are sticking with SunPower and Suntech.
Q: I see a concentration in wind among your largest positions.
A: Yes, the big turbine manufacturers, Vestas and Gamesa. The barriers to entry in wind are very high. These players will have exposure to the growing U.S. market. Like solar, wind projects are being scaled back, and that will have an impact.
Q: Other sectors?
A: Sure. We are in several sectors that rely less on securing funding to build projects. For instance pollution control, water. We have a stake in Stericycle. They manage, collect and dispose of medical waste, which also has high barriers to entry and is relatively recession-proof. We like Covanta, which is the only waste-to-energy generator in the U.S. Its balance sheet looks healthy and it has good cash flow.
Q: And in water?
A: There are really no stars in water. They tend to be diversified. We own Nalco, which chemically treats water for energy and industrial uses, taking the contaminants out. It addresses scarcity. They help their clients make better use of water and potentially to release it back into the environment.
Q: Let me ask you about a couple of areas that aren’t quite ready for prime time. Is cellulosic ethanol investable, in your view?
A: Not now, perhaps eventually. In Europe, Abengoa is involved in that. And the enzyme companies. We own Novozymes, which provides enzymes to the corn ethanol industry and is working on second-generation. Also Danisco is doing R&D. That’s a company we watch.
Q: And carbon capture and storage technology? The coal energy business is preparing for carbon limits and emissions trading. Is that a theme for you?
A: Carbon is going to be costly down the road but perhaps not within six or seven years. It will be quite complex putting a framework together, thrashing around with the details and the politics. But there are already many CCS pilot projects across the world. Alstom is in the portfolio because it is No. 1 in capturing noxious chemicals from coal plants. That’s a big business for it, but also it’s a leader in mass transit. The company is building the most up-to-date high-speed rail projects in the world. It’s a conservation play.