Losses Piled Up for ‘Green’ Funds as Trash Didn’t

Every dog is supposed to have its day, but not so yet in this decade for mutual funds that specialize in environmental stocks.

The average environmental fund lost 10.5% of its value in the first half of this year, according to fund tracker Lipper Analytical. That was nearly double the average loss of general stock funds.

But then, lagging the market--by a huge margin--is the only way environmental funds have distinguished themselves since 1990.

Last year, the 10 environmental funds tracked by Lipper eked out a paltry 3.3% average gain, while the average general stock fund rose 12.5%. In 1992, the environmental funds lost 6.2%, on average, while the typical stock fund gained 8.9%.

The painful lesson learned by investors in these funds is how long a market slump can drag on once an industry’s fundamentals go bad. The experience also may be educational for investors who’ve bet heavily on other relatively narrow sectors, such as utilities and emerging-market stocks.

The irony of the environmental funds’ miserable record, of course, is that this was to be the “green” decade; pollution control and cleanup were expected to be booming businesses worldwide.

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Indeed, by 1989 the environmental business was suffering from the same excessive hype that had been directed at oil companies a decade earlier. Just as oil in 1979 was undoubtedly going to $100 a barrel within a decade, so too demand for “green” services was surely going to explode in the 1990s.

Not quite. With the recession that began late in 1990, the major U.S garbage haulers, such as Browning-Ferris Industries and WMX Technologies, suddenly discovered that landfills--allegedly in short supply--really weren’t after all.

“People always thought that you can’t lose because there’s always going to be garbage,” says Maurice Schoenwald, whose $30-million, 12-year-old New Alternatives fund in Melville, N.Y., was the first environmental fund. “But if business is bad, there’s a lot less garbage,” he says.

Competition among haulers became so tough for Browning-Ferris that its operating earnings fell from $1.95 a share in 1990 to $1.25 last year.

Recycling, too, began to reduce the supply of garbage. Yet playing the recycling stocks, such as Thermo Fibertek, a maker of paper-recycling machinery, also bombed as parts of that business became too successful: For a long while, there was more paper being recycled than could be used.

Meanwhile, cleanup of toxic waste sites and installation of pollution-control equipment never reached the levels many analysts had projected for the early ‘90s. The recession had a lot to do with that, says John Schroer, manager of the $40-million Invesco Environmental fund in Denver. “Dealing with environmental companies is something waste-producing companies don’t want to do,” he notes. When profits are down, installing new equipment becomes even less of a priority.

San Diego Gas & Electric learned that the hard way via its Wahlco Environmental subsidiary, for which SDG&E; took a big writedown Tuesday.

In other cases, hazardous-waste disposers such as Rollins Environmental and Chemical Waste Management have been hurt because waste producers have complied with anti-pollution rules, but with cheaper solutions--such as burning hazardous stuff in kilns that power cement plants.

Perhaps the biggest disappointment for green firms, however, has been the waning federal commitment to the pollution fight, many analysts contend. “The enforcement of environmental regulations has diminished,” Schoenwald laments.

Many hazardous-waste cleanups have become bogged down in litigation, he says. An overhaul of the “Superfund” toxic-waste cleanup law--to speed action and end haggling over cleanup costs--is making its way through Congress, but analysts see no final action until 1995.

Still, there are some bright spots. Schroer says the garbage haulers, like WMX and Attwoods, are turning as landfill fees rise in some parts of the country as the economy gains. Schoenwald has big bets on up-and-coming green firms such as fuel cell maker Energy Research, windmill firm Kenetech and plastic recycler Wellman.

Given their long slide, environmental funds may now constitute the ultimate contrarian bet. But then, as in 1991, ’92 and ‘93, you could still be early.

The ‘Green’ Decade?

Despite expectations that environmental cleanup and pollution control would be major growth industries in the 1990s, stocks of many companies in those businesses have performed miserably. A look at average annual returns for ‘environmental’ stock mutual funds and for general stock funds:

Average total return: Environmental General funds stock funds 1990 -9.3% -6.3% 1991 +8.3 +35.6 1992 -6.2 +8.9 1993 +3.3 +12.5 1994* -10.5 -5.8

* through June 30

Source: Lipper Analytical Services