Trading On Scarcity

For clients who want an actively managed, environmentally conscious fund, it's worth taking a look at the very small but fast-growing Gabelli SRI Green portfolio. If you're worried about the future of nuclear power or the revolutions causing oil price spikes, you might consider an alternative-energy mutual fund. "It's a way to bet on an increase in commodity prices without buying actual mines," says Tom Konrad, a chartered financial analyst who blogs at AltEnergyStocks.com.

Gabelli SRI Green lead manager John Segrich has beat his rivals most recently by avoiding clean-energy stocks like wind and solar, which depend on subsidies. Instead, he's buying energy-efficiency stocks, such as recyclers, and new cleaner technologies, as well as small and midsize companies that could do well even if one green trend doesn't pan out.

"We don't just screen out the bad companies," Segrich says. "We don't buy themes and we don't buy companies because they're doing good in the world. We buy stocks. We do a structured fundamental analysis."

"As the world population grows from seven billion people to 10 billion, we'll see constraints in resources," he adds. "We want to invest in those constraints or the companies that have solutions."

Of the 24 environmentally conscious funds tracked by Morningstar, Gabelli SRI Green has had the only five-star rating, earned in July 2010. Five-star funds attract attention, of course: In the last quarter of 2010, the fund's total net assets more than doubled, rising to $36.5 million.

The new money has been chasing stellar performance: In the three years ending mid-April, the fund, which Morningstar classified in the midcap growth group, enjoyed an annualized return of 18.5%, compared with 5.5% for that category. At the end of April, Morningstar reclassified it as a world stock fund because Segrich's picks have been spreading out around the globe.

 

ACTIVE TRADING

One secret behind his five-star performance may be his willingness to sell. "He's a hyperactive trader," Konrad says. "He figures out which way the subsidy winds are going to blow." Segrich sold the fund's solar stocks at the end of last year, betting that Germany and Italy would cut back on subsidies for sun power, following moves by France and the Czech Republic. Turnover last year was 190% - stunning, given that most environmentally conscious funds hold stocks for two years on average, Konrad says.

Segrich laughs at the characterization that he's "hyperactive," noting that he also runs a hedge fund, open to investors prepared to put in at least $1 million. "I don't run the retail fund like a hedge fund," he says. "We've had companies we've owned a year and a half, and some that we own a couple of weeks. These are volatile industries and you see external shocks to the market."

Hyperactive or not, selling those traditional clean-energy buys was a good move. The WilderHill New Energy Global Innovation Index fell 14.6% in 2010. According to Konrad, energy efficiency stocks returned 19% last year, while solar stocks sank 25% and wind stocks plunged 37%.

Another advantage of active trading is that Segrich can move around in the manufacturing chain leading up to a hot product in the green world. "We aggressively break down the food chain," he says, seeking companies "off the beaten path."

As new environment-related industries mature, he says he will hold stocks for longer periods. The fund's biggest holding, Umicore, recycles precious metals. Other picks are Horsehead Holding, the world's biggest producer of zinc from recycled sources, and Globe Specialty Metals, which manufactures silicon metals for the photovoltaic and aluminum industries.

 

INNOVATION CALLING

The fund has bet on Universal Display, which should profit from the spread of so-called organic LED displays on cellphones, laptops and the like - such as Samsung's Galaxy phone - which are easier to make and require less power to run. Segrich expects Samsung to fully switch to the alternative LED displays.

Looking ahead, Gabelli says, "We need to build the equivalent of the Internet in electricity. We had a telephone network that worked. Then, with new demands, we had to build a new network." In five years, he expects electric cars will be found worldwide. To take advantage of that change, he's bought Cooper Industries, Siemens and Schneider Electric. "We're already seeing the projects being awarded. Utilities are building now," he says.

Segrich isn't trying to predict which car company or battery technology will win the race to dominate electric cars. Instead, he owns Polypore International, which makes separators for lithium-ion batteries used in today's vehicles.

Electric cars need bigger batteries with more separators. "If the electric car takes off, it will use batteries with a separator and there are only three world-class companies that make separators," he points out. With the choice narrowed to three, Segrich chose Polypore.

That's one example of what Segrich calls a "picks and shovels" play: instead of buying the mines, you buy the tool-makers. "I look for solid fundamentals where I can own the company today, but if a theme works, the company will take off." For example, he says biofuels have been "a disaster," but he owns Novozymes, a Danish company that makes an enzyme needed to convert food stock into ethanol. Novozymes sells the same enzyme to Tide, and has solid cash flow today.

 

THE CHINA FACTOR

Segrich expects China to continue growing 8% to 9%, putting pressure on scarce natural resources. Sino-Forest, the leading forest plantation operator in China, is one of his top-performing choices.

Because water is an ever more valuable resource, he's looking at desalination plants. But the stocks must hold up to a close review. "We don't have a huge position at the moment because the options aren't appealing," he says.

Under the fund's guidelines, Gabelli SRI Green may not invest in the top weapons contractors or in companies that derive more than 5% of revenues from tobacco, alcohol, gaming or abortion-related products. The fund seeks out companies that offer products, solutions or services that address climate change, energy security and independence for the United States, as well as natural resource shortages and urbanization.

Segrich began his career analyzing Internet companies as an intern for Gabelli while studying for a philosophy degree at Boston College. After four years at Gabelli post-college, he moved to London in 2000 to head up Goldman Sachs' European Internet and then software research teams. He switched to J.P. Morgan in London before returning to New York in 2008 to lead Gabelli's sustainability research.

Segrich identifies (no surprise) Mario Gabelli, as well as George Soros, as investors who have inspired him. Gabelli taught him to "read the footnotes and ask the tough questions," Segrich says. He admires hedge fund managers David Einhorn of Greenlight Capital and Bill Ackman of Pershing Square Capital for standing by their analyses, even when the markets didn't agree.

"We want to be judged on performance," Segrich says. "We think the areas we're investing in will be higher growth areas in coming decades."

 

John Segrich

Age: 37

Credentials: BA, philosophy, Boston College

Experience: Portfolio manager, Gabelli & Co., (2008-present); analyst, J.P. Morgan (2004-2007); analyst, Goldman Sachs (2000-2002)

Ticker: SRIGX

Inception of fund: June 2007

Style: Mid-growth

Assets under

management:

$58.3 million

Three-year performance as of May 10, 2011: 16.8%

Five-year performance as of May 10, 2011: N|A

Expense ratio: 2.01%

Front load: 5.75% for A shares

Minimum investment: $1,000

Alpha: 16.2% vs. MSCI EAFE for 3 years

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