Arnerich Massena bets $400M on green

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Tony Arnerich of Arnerich Massena is betting that green business will deliver investment returns similar to the tech boom.

Editor's Note: The Sustainable Business Oregon special section publishes with the Friday, Sept. 2 issue of the Portland Business Journal. Pick it up to read this story and others on the topic of sustainable investment.

Chris Abbruzzese doesn’t look like a mover-and-shaker in the sustainability movement. His resume is more white shoe than Birkenstock. He worked on Wall Street for major banks such as JPMorgan and Bear Stearns before relocating to Portland and joining the investment firm Arnerich Massena in 2009.

Since then, Arnerich Massena has become a major player in green-oriented investing, steering nearly $400 million into industries and companies ranging from wind farms to green buildings. The firm manages roughly $15.3 billion for a variety of pension funds, institutional investors and wealthy individuals, making it one of the most active investors, among its peers, in sustainable businesses.

Arnerich Massena CEO Tony Arnerich said the sustainable investing strategy isn’t designed to give clients warm, fuzzy feelings about saving the planet.

“This is not about global warming or carbon,” he said.

Instead, the pitch is simple: Imagine if you could wind the clock back to 1980 and invest in technology companies. Arnerich argues that as the world’s resources become more and more scare, companies that offer sustainable products will experience explosive growth. If true, investing in green businesses today could mean fortunes for investors tomorrow.

A $10,000 investment in Microsoft’s 1986 initial public offering, for example, would be worth more than $3.3 million today.

Critics, however, say everybody wants to invest in the next Microsoft. Betting millions of dollars on it, they say, isn’t a wise strategy. Anybody remember Kaypro computers? Or Commodore?

“Many of these technologies start out looking rather promising,” said John Abrahamson, chief investment officer of Portland-based Sigma Investment Management Co.

In mid-August, for instance, Massachusetts-based Evergreen Solar Inc. filed Chapter 11 bankruptcy. The once-promising company had a stock price that briefly traded above $100. It also received more than $40 million in government subsidies, according to the Boston Globe.

“For every 10 investments in this category you get one home run and nine that flounder,” Abrahamsom said.

The ethanol industry, another once-hot area for green investments and government subsidies, has also stumbled. During the Bush administration, the industry was viewed as the solution to the country’s reliance on foreign oil.

Among the dozens of ethanol companies that have since failed: Vancouver, Wash.-based Cascade Grain Products LLC. The company filed Chapter 11 bankruptcy in 2009 after receiving a $20 million loan from Oregon’s Department of Energy.

“I like green things,” said Darin Richards, chief investment officer in the Lake Oswego office of AKT Wealth Advisors LLP. “I also like golf. But a lot of golf companies are horrible investments. You have to separate the emotional piece from the investing piece.”

While some money managers question whether it’s possible to outperform the market by investing in green businesses, others gave an animated defense of Arnerich’s thesis.

“This entire opportunity can be encapsulated in a very simple sentence: four billion new consumers eating chicken and driving a car over the next couple of decades,” said Dave Chen, founder of Portland-based Equilibrium Capital Group LLC, a green-leaning investment firm.

As the population grows and democracy lifts the economies in places like China and India, companies that can sustainably provide simple commodities like water and clothing will have enormous demand.

In the past 12-18 months Chen said there’s already been a significant uptick in the number of wealth managers focused on sustainable investments.

“Why do you think Berkshire Hathway bought a railroad?” Chen asked. “(Warren Buffett) is moving ag products and he’s moving fuel stock toward the West for Asia.”

“At the end of the day we’re all looking for opportunities to create gains for investors,” Chen said. “Tony was one of the first to spot that there was alpha to be generated by these market inefficiencies.”

The Arnerich answer

Arnerich concedes there’s a lot of opposition to sustainable investing. He says the word “sustainability” is still toxic to many investors. He admits his firm got “beat up” in the investment community after it published a white paper on the concept in 2009. Partially for that reason, a soon-to-be released sequel to the that paper leaves the word “sustainability” out of the title.

But Arnerich also says his firm’s business model puts it in the perfect position to change people’s minds about the concept.

In a nutshell, Arnerich Massena tells major investors, such as pension funds and wealthy individuals, where to invest their money. In order to offer that advice, its research team, which includes Abbruzzese, spends hundreds of hours screening potential investment managers. Abbruzzese said the firm’s commitment to “deep dive” research on investment managers attracted him to the firm, saying, it “doesn’t spare a penny” when it comes to research.

The process of screening managers includes the obvious stuff such as examining business plans, meeting the executive team and reading resumes. The firm goes one step further by talking to neighbors, co-workers and former employers.

Approving a manager can take more than a year. Arnerich said the lengthy due diligence helps the firm insulate clients from sour investments like Evergreen Solar and Cascade Grain Products and puts it in an ideal position to find the green version of Microsoft.

He also said the commitment to quality is one of the reasons for the firm’s low turnover. He estimates the 65-employee firm has 3 percent or less annual turnover, well below the 30 percent to 40 percent for the industry as a whole. It didn’t lay off any workers during the financial crisis.

In addition to the low turnover rate, the firm’s a big part of the North Portland community. It owns the art deco building on Martin Luther King Jr. Boulevard that it calls home. It also supports programs at nearby Irvington School.

Putting it on paper

The firm started studying sustainability in mid-2007 when Arnerich asked senior analyst Bryan Shipley to take a look at the industry. After three months of initial research, the firm decided it was worth more exploration. It started scouring the market for investment managers and spoke with “any groups that flew the sustainability flag.”

It subsequently released the 2009 white paper that argued a “sustainable investment strategy has the potential to perform as well as, or possibly better than, a traditional investment portfolio.”

Shipley said clients had mixed reactions to the paper and inevitably wanted to know about projected returns.

His answer: The goal isn’t to invest in “feel good” products and get a lower return than the overall stock market. The goal is to beat the market.

“That was really the first conversation we had,” Shipley said. “We did not want to look at strategies that did not meet or exceed investment standards or benchmarks. It had to be the driver of the conversation in our client portfolios. And we found enough managers that had delivered (results) to keep our interest in the space.”

Shipley and Abbruzzese declined to provide specifics about the managers or investments the firm uses, citing the strategic advantage it gained by its extensive vetting process.

The benchmark for the strategy is the MSCI World, an index of 6,000 global stocks that’s up roughly 5 percent in the past two years. Shipley said clients that have invested in the firm’s green strategy have beaten that benchmark.

Abbruzzese said the challenge today is waiting for more institutional quality investment products to hit the market. Many green businesses and opportunities have short track records that are too risky for clients like pension funds.

At the same time, he said the window of opportunity for any high quality investment opportunity is inevitably short lived.

As he puts it: “There’s very little difference between being early and being wrong.”

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