Big losses at so-called ‘green’ equities funds this year are halting the proliferation of the once hot investment products in Asia and triggering a shift by investors in some centers such as Japan into safer bond options.
Green equities funds — a big draw over the past few years on heightened concerns on energy prices and the environment — have been clobbered as stock market volatility, economic pessimism and falling energy costs have driven investors away from the sector.
The poor performance comes as Asian governments are pumping vast amounts — spending exceeded $39 billion in 2009, with China accounting for the bulk of that — into renewable energy and other environment-related projects. It may mean that companies in the business will find it harder to attract new capital.
A third of the 20 worst-performing Japanese funds this year are green funds, with returns down a fifth or more for several of them, according to data from Lipper Inc. By comparison, the broad TOPIX index has lost just 8.6 percent.
“Environment-related funds are in a period of stagnation,” said Makoto Tsuchiya, a fund manager at Tokyo’s STB Asset Management, an arm of Japan’s No.5 bank Sumitomo Trust and Banking. “For now, it’s very difficult to attract money from investors.”
Investor withdrawals and market impact have shrunk the total size of environment-related equities mutual funds in Japan to 468.3 billion yen ($5.56 billion) as of June from 1.2 trillion yen less than three years ago, according to Social Investment Forum Japan (SIF-Japan), a non-governmental organization.
The Sumishin Environment New Deal Fund, overseen by STB’s Tsuchiya, has seen its size drop to $24.5 million as of end-August from its peak of $73 million in September 2009. The fund is down 16.6 percent this year.
The Deutsche Global Warming Prevention Equity Fund of Deutsche Asset Management (Japan) is down nearly 20 percent in 2010 and has seen its assets drop 36 percent this year to $292 million as of end-August, according to Lipper, a unit of Thomson Reuters.
The fund’s three biggest exposures were to utility contractor Quanta Services, wind turbine components maker American Superconductor and Danish wind turbine maker Vestas, whose shares are down 7.3 percent, 24.4 percent, and 33.7 percent, respectively, this year.
As their performance flounders, new green-fund launches in Japan are drying up. Six such funds were launched in the year to June, up from three in the previous year, when the financial crisis was at its peak, but far less than the 30 introduced in the year to June, 2008. There were 89 such funds in Japan as of end-June.
The situation for the funds is not very different elsewhere in Asia.
Among all Southeast Asian equity funds, for instance, the biggest loser is Thailand’s $3.3 million K Alternative Energy Equity, which is managed by Kasikorn Asset Management and is down 32.7 percent this year. In contrast, the main Thai index is up 32.6 percent in 2010.
“The outlook for green funds depends on the performance of the global economy,” said Kasikorn’s Tanawat Roongtanapirom, adding it would be two to three years before it picks up.
BOND AFFAIR
A similarity of holdings among the funds, given the relatively limited universe of stocks, is also contributing to the sector’s underperformance. Managers of some green funds, STB’s Tsuchiya says, are now trying to break from the mold and are buying banks and trading companies to stem their losses.
Many Japanese investors have also turned to bonds that are linked to the environment and other socially responsible investments (SRI) projects. SIF-Japan data shows the total volume of bonds linked to the environment and SRI had surged to 423 billion yen by end-August, with more than two-thirds of the total volume issued this year.
“It’s pretty straightforward in these bonds as investors can clearly understand what kind of projects the proceeds are going into,” said Kenichi Tatsuzawa, chief executive officer at HSBC Securities Japan.
HSBC arranged four tranches of Japanese retail-targeted clean-energy uridashi bonds, or bonds offered by issuers outside Japan and targeted at Japanese retail investors, issued by the Asian Development Bank in September.
SRI-linked uridashi bonds have typically been offered by issuers with high credit ratings and the bonds are sold in high-yielding currencies. Investors thus do not have to worry about credit risks, while they can seek income gains and possibly take foreign exchange gains.
“SRI uridashis are attractive because investors can see exactly what they are investing in,” said Yoshitaka Yoshida, deputy director at SIF-Japan.
“If we invest in a stock or a mutual fund it’s difficult to really tell whether the money is actually used to benefit society,” said Yoshida, who is also a retail investor.
Still, some are optimistic that the green equities funds are here to stay and will make money for investors in the long run.
“The environment theme will stay in place for a long time. A corporation simply cannot ignore this theme when they do business,” said STB’s Tsuchiya.
($1=84.18 Yen; $1=30.60 Baht)
