President Bush is bullish on alternative energy, but experts are somewhat divided over whether his enthusiasm might spill over into the money management industry.
Sure, there are a number of finely performing, socially responsible funds that invest in new energy and screen against companies with questionable environmental records or other suspect transparency in their business practices. In fact, according to the Sierra Club of San Francisco, one out of every nine dollars under professional management in the U.S. is involved in socially responsible investing.
And according to Lipper of New York, as a group, those funds returned 9.43% for the year ending March 10. By comparison, the S&P 500 returned 4.9% in 2005. Over the three-year period, they've returned an average of 18.1%. Some socially responsible funds in particular are way out in front over the past three years, such as the Winslow Green Growth Fund from Winslow Management and the Pioneer Growth Opportunities fund from Pioneer Investments, a pair of Boston-based products that have delivered returns of 40.23% and 30.8%, respectively.
Alternative energy, however, is a tiny corner within the larger, so-called "green sector" that socially responsible funds prospect. So it would seem nave to presume that Bush's stumping for new methods to alleviate what he calls "America's addiction to oil" would be enough to send investors scurrying for funds overweight in alternative energy.
Nor is it likely that too many prudently managed fund complexes heard Bush's State of the Union address two months ago and, sensing a potentially hot new sector, started building out "pure-play" alternative energy funds in anticipation of a new trend.
What Bush's multi-billion-dollar energy initiative has revealed, traditional thinking would suggest, is that alternative energy is probably as far away from producing a mainstream mutual fund as, for example, the domestic auto industry is to putting thousands of hydrogen-powered vehicles on the nation's roadways.
Or is traditional thinking simply stuck in the past? Matt Patsky, portfolio manager on the $250 million Winslow Green Growth Fund, thinks it might be.
"I'm sure there are some people at the bigger houses planning something right now, but all it takes is for oil to go down $10 a barrel for them to scrap those plans. Right now, though, it looks like an area with promise," said Patsky, who allocates 20% to 25% of his fund's assets toward alternative, or renewable, energy plays.
"But that would also be a scary sign to me," he continued, "because when the big guys get in there, it's typically time to get out. We saw that in the Internet run-up. We're not seeing it yet, but it could happen because there is broader interest in the space among traditional fund managers."
And among everyday investors, Patsky said. Since the President initiated the alternative energy discussion, the Winslow Green Growth Fund has witnessed increased interest from new investors. While he thinks Bush's words might be bigger than what gets delivered after Congress finishes scrutiny of the President's budget later this year, Patsky said the former Texas oilman has moved the debate in Washington from one that has traditionally been politically based to one that is economically based.
"The thinking has always been that liberals like renewable energy, but there's never been any support on the other side of the aisle," explained Patsky, a 20-year veteran of portfolio management and investment analysis. "But he's changed the political dialogue, which is good, because it is an issue of economics and energy security."
Furthermore, moving the discussion out of a political context for the long-term might also remove some volatility from alternative energy, which goes in and out of favor among investors as government subsidies to alternative energy companies rise and fall. Nonetheless, Patsky still warns even the staunchest environmentalists within Winslow Management's separately managed account business to refrain from dedicating 100% of their assets to an alternative energy.
Well, most of them, anyway.
"We had a separately managed account investor who came in two years ago and wanted 100% of his portfolio in alternative energy. We advised against it, but it was less than 1% of his net worth so he could afford it," Patsky said.
Winslow Management's SMA minimum is $10 million.
Others have recently followed that initial investor's lead, and now the firm is building another SMA product for investors who want additional exposure to alternative energy. That's in addition to the existing SMA, which is also overweight in alternative energy and just won what Patsky called a "significant" mandate from a large institutional investor. Through March 13, the 30-month-old SMA has posted an annual average return of 17.8%.
But outside of those Winslow SMAs and a handful of exchange-traded funds, like the PowerShares WilderHill Clean Energy Portfolio that's comprised of environmentally friendly corporations, no pure-play fund in the alternative energy sector exists in the U.S. That's mostly because there are too few quality companies with market capitalizations sizeable enough to encourage investment, said David Schoenwald, founder of the New Alternatives Fund in Melville, N.Y.
Founded in 1982, the fund bills itself as the industry's first environmental mutual fund, as well as the greenest fund in the U.S. and the first with a significant concentration in alternative energy. But to generate returns, the fund has been forced to allocate 35% of its $79 million under management to foreign securities. It's been volatile, too. Through Feb. 28, the fund was up 17.27% year to date. Its best three-year period was 2003 through 2005 when it delivered average annualized returns of 15.10%. Conversely, the fund's worst three-year snapshot was 2001 through 2003, when it lost an annualized average of 8.66%.
"We've recently expanded overseas, because companies overseas tend to be more profitable. They've been doing it longer," said Schoenwald, who characterized Bush's energy plan as "disingenuous."
"It's a P.R. move," he said.
But, Schoenwald added, it's not just the historical pattern of start-and-stop government subsidies that makes the alternative energy sector so volatile here in the U.S.; it's also a tendency among politicians to draw down the enforcement of environmental laws that inhibit pollution and energy consumption.
Nonetheless, he does see significant momentum in solar, wind and bio-fuel companies, as well as companies that specialize in technologies that improve energy efficiency.
John Quealy, a research analyst with Canaccord Adams in Boston, agrees. He thinks a confluence of recent events - such as soaring oil prices, a growing national discussion over energy security, an increasing number of renewable energy companies with market caps over $2 billion and the commercial acceptance of the Toyota Prius - have combined to make an alternative energy fund with predominate exposure to U.S. companies plausible.
"I don't think a fund with 30 or 40 pure plays and some dilution" would be out of the question, he said.
For example, he doesn't think it would be a stretch to dilute an alternative energy fund with the likes of Toyota, which as an automaker is a contributor to harmful greenhouse gases, but as a hybrid innovator, it's also a powerful, deep-pocketed change agent within alternative energy.
"A solar-only, or hydrogen-only fund, probably not, but today there is a much broader universe to invest within alternative energy," he said.
Jeff Tjornehoj, a research analyst with Lipper, remains skeptical. To satisfy its fiduciary responsibility, he said, an alternative energy fund would have to look for consistent earnings results from its holdings, and "for the most part, these companies are built on hopes and dreams." And most of them, he said, are still too small for funds to accrue a meaningful position.
"The bottom line is that the investing community doesn't believe alternative energy companies are destined to be the darling of Wall Street," he said.
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