A Play For Tree Huggers

Investors have gotten the blues lately from green investing--buying into mutual funds that hold shares of environmental-services companies. With the recession keeping production down, companies that clean up industrial waste had less to do. And managers had little incentive to pay for more pollution control and waste removal when enforcement of environmental laws was lax. The result? Environmental funds lost 6.18% in 1992 vs. a gain of 6.85% for all equity mutual funds, according to Lipper Analytical Services.

But with industrial output increasing and the Clinton Administration promising to get tough on enforcement, the funds have a brighter future, says David Schoenwald, president of the $31 million New Alternatives Fund. What's more, environmental companies' stock prices have lagged the market since the election, so there's room for gains, says Barry Mannis, a Morgan Stanley analyst.

Would-be investors have several options. The half-dozen so-called green funds invest exclusively in socially responsible environmental companies. These small funds select companies that provide environmental services and have good labor relations, treat women fairly, and so on. George Gay, manager of the $3.4 million Progressive Environmental Fund, likes High Plains, an ethanol maker that should get a boost from the proposed energy tax.

Sector funds managed by Fidelity Investments and others invest in environmental-services companies such as Wellman, a plastics recycler, and Chemical Waste Management, but they don't hold the stocks to the same standards as do green funds. They do offer more diversification, but several fund managers warn that some companies, particularly those involved in waste disposal, may be hampered by tougher environmental regulations.

BIG BASKET. General socially responsible funds, such as the $70 million Parnassus Fund, also buy environmental-services stocks. But they won't have as big an impact on the funds' performance.

Anyway, no specialized fund should be the core of a portfolio. "Bear in mind that environmental funds of whatever kind are sector funds and are volatile," says Mindy Lubber, president of Boston's Green Century Capital Management. So far, this year's results are mixed: The New Alternatives Fund is up 5%, Fidelity's environmental-services fund is up 2.8%. But as new government policies take shape, some funds might start putting more green in investors'