More Options for Environmentally Conscious
A funny thing has happened to environmental mutual funds lately. Despite posting some relatively poor investment results so far this year, the funds are attracting a growing following. Could it be that investors have finally found an area where they feel they can do the Earth a good turn and still make money?
If so, that would be a milestone among the socially responsible or ethical mutual funds. These portfolios, which attempt to avoid the worst corporate offenders, haven’t made much of an impact even though they’ve been around for decades. Most fund-tracking services don’t even consider the socially responsible portfolios as a separate category. People might get riled up over tobacco use, animal rights, gambling or apartheid, but for the most part they haven’t reflected such concerns in their mutual fund purchases.
Excluding the environmental sector, there are only about a dozen socially responsible portfolios, and they’ve attracted less than 1% of the $1.2 trillion invested in all mutual funds. One problem is that the funds focus on a range of issues for which there’s not always universal concern. Perhaps more important, many people apparently fear that their investment results could suffer if the portfolio manager must avoid certain companies--be they polluters, weapons manufacturers, alcohol marketers or nuclear-powered utilities.
The great appeal of the environmental funds is the tremendous moneymaking potential of the companies in the industry. “Not only have we got the problem of cleaning up the various messes here and around the world, but we have to make sure that the various wastes are handled properly whenever anybody builds a new plant,” says Dan Leonard, manager of the Financial Strategic Environmental Services fund in Denver. “There’s an awful lot of business out there.”
Actually, there’s no monolithic environmental-services industry but rather a variety of smaller sectors, each with its own problems and potential. For example, landfill operators enjoy a fairly predictable business, while firms that remove asbestos from buildings are cyclical. “Most asbestos-abatement work is done on commercial buildings, particularly when the properties are being sold. That’s why the business depends on the health of the real estate market,” explains Glenn Cutler, manager of the Denver-based Schield Progressive Environmental Fund.
Leonard believes that water-remediation companies will enjoy expanding business opportunities as consumers and legislators place a greater emphasis on clean water. And he believes that biotechnology firms that develop organic pesticides and fertilizers will enjoy ready markets for their products.
Despite the long-term potential, many environmental stocks have struggled in recent months. During the first half of 1991, this was one of the poorer-performing market groups, and the environmental funds suffered with them.
The problem surfaced when several bellwether corporations reported lower-than-expected earnings, although most remain solidly profitable.
“The perception had been that the environmental companies were largely immune to a weak economy,” Cutler says. Although the first-half profit news was disappointing, he believes that investors overreacted. “These companies might not be able to sustain 20% growth each year, but they’re not prone to sharp cyclical downturns like computer stocks.”
One caveat about environmental funds is that the companies they invest in aren’t all corporate angels. In fact, there’s some question as to whether this sector really qualifies as an area of ethical investing.
“An industry such as this will have certain inherent problems when handling waste,” notes Trex Proffitt, an analyst with the Investor Responsibility Research Center in Washington. “Some companies pollute as they clean up . . . and some methods of disposal are not viewed by all environmentalists as ecologically sound.”
When buying stocks, most of the environmental mutual funds don’t try to weed out offensive corporations. Cutler’s portfolio is one of the few that does. He avoids companies that have been fined or sued for price-fixing, improperly removing hazardous wastes and other infractions. “Most of the large firms are unacceptable to us,” he says, citing industry giants such as Browning-Ferris and Waste Management.
For investors, the good news is that there’s a lot more to choose from among environmental funds than just two years ago. The bad news is that they’re all so young that buying one requires a leap of faith.
The two oldest funds--Fidelity Select Environmental Services (3% load; 800-544-8888) and Freedom Environmental (4.5% load; 800-225-6258)--date only to 1989. Among the newer choices, the best bets include Kemper Environmental (5.75% load; 800-621- 1048), Financial Strategic Environmental Services (no load; 800-525-8085) and Schield Progressive Environmental (4.5% load; 800-826-8154).
Lipper Analytical Services counts seven funds in total. Their combined assets have nearly doubled to $220 million from $130 million at the start of 1990, thanks to the introduction of four new portfolios during that time. Of the seven, only Kemper Environmental has outperformed the average equity fund so far this year, although Schield Progressive Environmental is roughly even.
With a stretch of the imagination, you might also include the New Alternatives Fund (5.66% load; 516-466-0808) within the environmental camp. It invests in companies engaged in solar energy and alternative fuels. An older portfolio, it has beaten the average equity fund during the past five years, Lipper reports.
There’s also Alliance Global Environment, a closed-end fund that trades on the New York Stock Exchange at prices set by market supply and demand. It recently sold at $11.25 a share, a 16% discount to the per-share value of its holdings.
Some analysts are touting environmental services as a key growth area of the 1990s. Most likely, the funds will attract a larger following as more investors desire to satisfy their pocketbooks as well as their consciences.
Top Social Concerns
Which ethical issues are investors most concerned about? The Investor Responsibility Research Center set out to answer that question. In a 1990 survey, it polled 44 financial advisers and investment managers who avoid the common stock of companies with objectionable policies or products. The IRRC asked these professionals to name the social issues most on the minds of their clients.
Environmental worries were cited by the largest percentage of investors, according to the money managers who participated in the study. Here’s the full list of ethical issues and the percentage of clients who expressed a concern over each.
Environment: 78%
South Africa: 73%
Weapons Production: 69%
Nuclear Power: 62%
Fair Employment: 49%
Tobacco Production: 42%
Labor Relations: 41%
Product Safety: 31%
Alcohol Production: 29%
Animal Testing: 22%
Gambling: 22%
Northern Ireland: 6%
