DOES CLEAN ALWAYS MEAN GREEN
(AS IN MONEY THAT IS)?

Wall Street loves fads and controversy. Not so many years ago, the financial experts discovered environmental investing, and environmental mutual funds became the latest fad. From the late 1980s through the early 1990s, the number of publicly traded funds that advertised themselves as "environmental funds" grew from one to over 15. Then Wall Street did a flip-flop and claimed that those funds had not done that well after all and, therefore, were not such good investments.

As is the case for so much Wall Street wisdom, this claim contains only a partial truth. Some environmental funds have done very well, while a good many others have fallen on their faces. The reasons for poor performances by some funds are more complex than the fact that the funds invested in the environmental industry. In order to cash in on the growing public awareness of environmental issues, many of the self-styled environmental funds simply bought everything and anything they could find that had something to do with environmental products and services. As is true in all kinds of investing, this scatter-shot approach was a recipe for disaster. Consider the example of waste-handling companies versus waste-management companies.

Not so long ago, waste-handling companies such as Waste Management and Browning-Ferris Industries were the darlings of Wall Street. What could be a better investment socially and financially than companies in the business of cleaning up the unending messes created by human beings? Stock prices soared through the 1980s, until reality set in. First, the recession cut down on the volume of industrial waste as more companies developed programs for waste minimization. In addition, more communities instituted waste recycling, reprocessing, and reuse programs. Second, environmentalism also gave birth to stricter requirements for landfills and the handling of hazardous wastes. This was fueled by the nationwide NIMBY ("not in my backyard") movement. The crusher for waste-handling companies was their inability to see the popularity of recycling and similar waste management practices by both individuals and businesses. No longer was it sufficient to merely pick up garbage, haul it off, and dump it in a hole in the ground. Environmental funds that had a large exposure to waste-handling comnpanies took a big hit.

A study of the performance of eight waste-handling companies versus eight companies that provided waste-management products and services -- ranging from pollution abatement equipment to recycling and treatment services -- demonstrated that of the former only two companies -- Chambers Development and Waste Management -- had a stock price gain from 1990 through 1991. Only one company -- Waste Management -- had a modest earnings per share gain for the same period of time. All the rest -- Allwaste, Browning-Ferris, Chemical Waste Management, Laidlaw, Mid-American Waste Systems, and Rollins Environmental Services -- had significant declines in earnings and stock price losses ranging from -5% to -54% from 1990 through 1991. For the same period of time, of the eight waste-management companies only two -- Andros and International Technology -- had earnings losses from 1990 through 1991, while only one -- IMCO Recycling -- had a stock price loss. The remainder -- Groundwater Technology, Ionics, Midwesco Filter Resources, OHM, Safety-Kleen, Sanifill, and TETRA Technologies -- had earnings and stock price gains ranging from +6% to over 45% from 1990 through 1991. The lesson for investors is to look with care at what type of environmental investments self-styled environmental funds hold in their portfolios.

In 1993, Lipper Analytical Services released the results of a performance study for six environmental funds. Among the group was the oldest environmentally and socially screened fund -- New Alternatives. This fund for years has used a stricter and more demanding screen than all others and has focused upon alternative and solar energy companies. In addition, New Alternatives' managers avoid companies in the environmental industry that cook the books, are charged for illegal dumping, or engage in restraint of trade practices for expansion purposes -- all not uncommon practices in the enviromental industry. From July 12, 1990, to February 4, 1993, New Alternatives had a total return of almost +25%. For the same period of time, all the other environmental funds with less demanding screens had losses ranging from -3% for Kemper Environmental Services Fund to over -22% for Oppenheimer Global Environment Fund (later closed).

Finally, Lipper identified USAffinity Green Fund (which merged into the Domini Social Equity Fund in 1995) as the top-performing fund in Lipper's "Environmental Funds" category for 1993. For the year, the fund returned over +20% to shareholders, compared to a return of about +10% for the Standard & Poor's 500 and an average return of about +4% for all the environmental funds in Lipper's category. USAffinity used two screens provided by Kinder, Lydenberg, Domini & Company (a Cambridge-based financial services company specializing in social and environmental investing) and Prudential Securities Socially Conscious Investing services.

The conclusion? Clean (as in environmental) can mean green (as in profits). As is true for all types of funds, investors must do their homework. Pick a fund manager who diligently researches the companies and tracks the rapid changes in the environmental industry. Stay away from funds that merely buy a bit of everything that is available and has anything at all to do with the environment. And remember, environmental investing is like any other type of mutual fund investing. Investment is for the long term.

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