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Going Beyond the Hype of Green Investing: Part 2

A roundup of green mutual funds and exchange-traded funds.

Michael Herbst, 03/18/2008

In the first half of this article, I wrote that we've witnessed a growing interest in green funds, meaning those that are environmentally oriented. Since then we've added coverage on a number of green funds. We approach green funds as we would any other kind of fund, which bears remembering, because the hype around green funds can be pretty tough to cut through. We home in on a green fund's strategy to uncover its risks and to get a grasp on how an investor might use it. Scrutiny of a green fund's management, including its experience and research support, gives us an idea how well-equipped it may be to handle the risks of its approach and to add value for investors. We also check out funds' price tags because high fees take a big chunk out of funds' gains.

Different Shades of Green
Investors should read the description of a fund's strategy closely because there are more shades of green than we thought possible. For instance, Portfolio 21 PORTX invests in companies around the globe that employ environmentally and socially sustainable business practices, such as European mega-retailer Carrefour. That slant gives it a broader sector range than most green funds and makes it diversified enough to use as a core holding. Spectra Green SPEGX has a similar large-cap bias and is also well-diversified across sectors, making it an option for green investors seeking a domestically focused core fund.

Yet most green funds would be suitable only in small doses. Many, such as Winslow Green Growth WGGFX, emphasize smaller, riskier companies. Others, such as Calvert Global Alternative Energy CGAEX, focus on narrow slices of the market. Many are quite concentrated: As of late, Guinness Atkinson Alternative Energy GAAEX and exchange-traded fund PowerShares WilderHill Clean Energy PBW had roughly 90% of assets stashed in the hardware, industrial-materials, and utilities sectors alone. That concentration is a big reason we're wary of many of the green ETFs we've seen. We just don't think investors need a water-based ETF such as Claymore S&P Global Water CGW, or the ultraconcentrated Market Vectors Environmental Services EVX. Funds with concentrated portfolios or a pronounced small-cap tilt court plenty of volatility and should be approached with caution.

In addition, some green funds will own companies with human rights, labor, or environmental issues that might cause them to fail socially responsible screens. New Alternatives NALFX and Portfolio 21 put a high priority on firms' social and environmental track records so that SRI investors can rest easy. Yet the Guinness Atkinson fund mentioned above might not fit the SRI bill due to its investment in palm oil companies (which have run into trouble for clear-cutting forests and labor concerns). Even so, that fund's updates, as well as Portfolio 21's Web site, give admirably detailed descriptions of the strategy and rationale behind its managements' picks.

Keeping the Bases Covered
What is considered green is likely to shift with changes in government regulation, the effects of climate change, investor sentiment, or all three. In addition, promising technologies are in fierce competition to gain a foothold in areas such as alternative energy, energy efficiency, and pollution reduction. Thus management's experience and its research support are critical. We appreciate the perspective of skippers Maurice and David Schoenwald at New Alternatives or Jackson Robinson and Matthew Patsky at Winslow Green Growth and Winslow Green Solutions WGSLX. Both teams have invested in green companies for more than two decades. Because they've experienced several waves of interest and disinterest in green investing, we're optimistic they could avoid some of the potholes that come with the territory. The team behind the Calvert fund is newer to the table, yet its bosses draw on several analyst teams, an external advisory board, and Calvert's SRI screening team to steer the fund.

Seeing Red over Fees
Many green funds are too expensive. For instance, the high 1.98% levy on the Guinness Atkinson fund is likely to drag on its performance. The 1.85% expense ratio on the Calvert fund is not much better. The levies on many green ETFs are inexplicably higher that their nongreen counterparts. Even the more reasonably priced Winslow Green Growth and Portfolio 21 are on the dearer end of the small-cap and world-stock categories, respectively. One notable exception is New Alternatives: Its 0.95% expense ratio lands in the cheapest quintile for broker-sold world-stock funds, making it the least expensive actively managed green offering that we've seen. We're generally wary of pricey funds because high fees are one of the most powerful predictors of future underperformance.

The Round Up
We've added a number to green funds coverage to help investors sort through the various offerings. Yet so far, few merit our recommendation. Portfolio 21 warrants a second look for investors seeking a broad-based green strategy. We like Winslow Green Growth due to its veteran management and because its strategy is broader than some of its peers' (yet its concentration and small-cap emphasis makes it suitable only as a supplemental holding). New Alternatives is appealing due to its management, SRI credentials, and low fees. Although we're less enthusiastic about the Guinness Atkinson and Calvert funds mentioned above, readers can read our new analyses of those funds as well.

For reasons I describe in this article's precursor, we think green investing could have staying power. Investors' enthusiasm fueled a strong run in 2005 and 2006 for many of the funds mentioned here. Yet that enthusiasm switched to pessimism in early 2008, and many of the funds posted double-digit losses for the year through March 3, 2008. The highs and lows of any market are nearly impossible to call, and the green investing road is likely to remain bumpy. Our main point is that investors thinking of going green ought to adopt a long-term view and pay extra attention to the fund characteristics outlined above. If you think there are ways Morningstar could help shed more light please let us know by sending your comments to Michael_Herbst@morningstar.com.

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