Investors go for gold in garbage

One person’s trash is another’s alpha.

Investment strategies in waste management — including trash collection, separation, disposal and recycling — are gaining institutional interest as landfills globally are reaching capacity and commodities prices are skyrocketing, according to analysts and managers.

“Clearly, rising prices [in raw materials] have made all the recycling much more profitable and interesting,” said Jvan Gaffuri, senior equity analyst at SAM Research AG, a subsidiary of SAM Group Holding AG, an asset management company based in Zurich, Switzerland.

In addition, stricter disposal and recycling regulations caused by limited landfill space throughout the world, particularly in Europe, have increased the cost of waste management. Technological advances have also made the process of converting waste into reusable energy or raw materials more efficient, investment managers said.

“The biggest opportunities are in waste [energy] and recycling,” said Kimberly Tara, chief executive of FourWinds Capital Management, a Geneva, Switzerland-based alternative-asset-management firm that specializes in global commodities and natural resources.

Last month, the government-owned International Petroleum Investment Co. in Abu Dhabi, United Arab Emirates, invested $300 million in a fund that invests in projects that convert gas emitted from crude-oil production into electricity and other products, according to a source close to the company, who declined to be identified.

The fund, which aims to raise $1.5 billion, is managed by MTM Capital Partners Ltd., a subsidiary of London-based Man Group PLC. Man Group is the world’s largest listed hedge fund manager, with about $78 billion in assets under management.

Rikky Hasan, managing director of MTM, declined to comment.

CHALLENGE SOLVED

“Recognizing the convergence of energy, resources and the environment has been a long-standing challenge for many countries worldwide,” Khadem Al Qubaisi, managing director of International Petroleum Investment, said in a statement issued last month when it an-nounced the transaction. “We believe the strategy developed by MTM solves this issue and serves as an enabler that can produce significant benefits to host countries.”

Man also runs the China Methane Recovery Fund, which has about $600 million in assets under management and invests in projects to capture methane gas from coal mining and use it to generate electricity and earn carbon credits.

In addition to sovereign-wealth funds, pension funds and insurance companies also invest in waste management investment strategies, managers said.

“We don’t see a lot of appetite for pure waste management allocations,” said Yannick Daniel, head of Société Générale Index, a subsidiary of Paris-based Société Générale. “Investors prefer to play the waste management theme along with other environmental topics, like water and alternative energy.”

Investors gain access to the sector generally through listed stocks or funds that have similar properties to both private equity and infrastructure, according to Rachel Whittaker, an associate at Mercer LLC in London.

Shifts in regulations or the political climate can pose significant risks to “any environmental strategy. So often, country-level responses are more important than global trends or initiatives,” Ms. Whittaker said.

Last year, San Francisco became the first U.S. city to ban supermarket plastic shopping bags, and New York the first to require recycling plans of large retailers.

In Europe, the European Parliament and Council agreed on revisions to the Waste Framework Directive, aiming to reduce 50% of household waste and 70% of construction waste by 2020. In the United Kingdom., landfill tax increased fourfold to about $64 a ton last year, according to a report published by SAM.

Performance has helped to lure investors.

Data from the SGI Global Waste Management Index indicates that the sector has outperformed the Morgan Stanley Capital International World index for the six-month, one-year, three-year and five-year periods ended June 30, according to back-tested and real returns. The index, which was launched last September, tracks about 30 companies that mainly collect, transport, process, dispose of or recycle trash.

“There are more defensive characteristics within these stocks,” SAM’s Mr. Gaffuri said. The company invests in waste management companies as part of the SAM Smart Materials Fund.

“A weakness in the global economy would affect industrial waste, with volume declining. But on the municipal side, people even in a very difficult [economic] environment are ready to pay for waste to be taken away,” Mr. Gaffuri said.

FourWinds is launching a fund this fall to invest mostly in mid-cap companies in the waste management sector. Aiming to raise between $300 million and $500 million, the fund is intended to profit from niche areas such as composting, recycling and landfill management.

Thao Hua is a reporter at sister publication Pensions and Investments.