A Choice of Alternatives
There are now 6 mutual funds focused on what I usually refer to as
"Clean Energy." I use this designation because "Renewable
Energy" does not include Energy Efficiency, which is the most cost
effective and scalable way of cleaning up the economy, while "Alternative
Energy" usually is taken to include such technologies as nuclear and
coal-to-liquids.
Nuclear may have low carbon emissions, but security concerns, waste disposal,
and cost all lead many investors who wish to green up their portfolios reluctant
to invest. Coal-to-Liquids companies such as
Rentech (RTK), in contrast, emit as much or more carbon than would be emitted by the use of the same amount of conventional petroleum products. As a strategy to cope
with peak oil, coal to liquids only makes sense if you ignore the climate
impact, and hence these companies cannot be considered clean, even if they are
alternative.
The six mutual funds which mostly focus on such clean energy technologies (as
opposed to the broader categories of Cleantech or Socially Responsible/SRI) are
the American
Trust Energy Alternatives Fund (ATEAX), the Calvert
Global Alternative Energy Fund (CGAEX), Firsthand
Alternative Energy (ALTEX), Guinness
Atkinson Alternative Energy Fund (GAAEX), New
Alternatives Fund (NALFX), and Winslow
Green Growth Fund (WGGFX). In general, all of these have relatively
high expense ratios, even for actively managed mutual funds, but if you are
uncomfortable trading the Clean
Energy ETFs or individual stocks, these are your choices.
A Renewable Mutual Fund in Your 401(k) Plan?
Another reason to use a mutual fund rather than an Exchange Traded Fund (ETF)
is if you're investing through a 401(k) plan. Although most 401(k) plans
do not offer a Renewable Energy Fund as an option, there is a movement
to encourage companies to add them with a Federal tax credit. There's
also a how-to guide
both for individuals trying to encourage their companies to add such funds, and
for companies which want to include such funds in their plan.
If your company is planning to add such a fund, it makes sense to add the one
which will bring the best diversification at the lowest cost, and that's what
this article is about.
Cost
Many fund advisors will say that their expense ratios are high because the
funds are still small. In some part, that is true, but the fees are also
high because there simply is not enough competition, and most people investing
in one of these funds spend more time thinking about the environment than about what
they're paying to protect it. In my view, it's important to protect
the environment, and worth spending a great deal of money on, but that money
should be spent wisely, in order that it be used to greatest effect.
There are two types of fees you will encounter: Front-end loads and ongoing
expenses.
Load Funds
A Front-end load is the percentage of your money which you pay to get into the
fund, under the rationale that this allows the fund to charge lower ongoing
expenses. If you are only considering mutual funds, and are confident that
you will leave your money in the fund for many years, then a load fund may make
financial sense.
The funds with Front-end loads are the Calvert
Global Alternative Energy Fund (class A), and the New
Alternatives Fund. Both have front- end loads of up to 4.75%, after
which the Calvert fund's expense ratio is 1.85%, and the New Alternatives fund's
expense ratio is 0.95%, making New Alternatives the far better choice of the
two. Most of these funds also have fee for early withdrawal, or back end
load, but only if money is not kept in the fund for a minimum period, usually 6
months or a year.
Front-end loads do fall with the amount invested, and are often waived for
institutional investors, such as 401(k) plans. Calvert offers class A
shares with no sales load to 401(k) and similar retirement plans, but New
Alternatives does not seem to.
No-Load Funds
No-load funds recoup their expenses over time, and this cost is expressed in
the expense ratio, which is the percent of assets every year which go to the
fund manager for expenses and the manager's profit. For the no-load funds,
here are the expense ratios:
Investor shares are those offered to the public, but a 401(k) plan would
qualify for the lower expenses available to institutional investors.
In this fee comparison, the Winslow Green Growth Fund wins out, since it not only
has one of the lower minimum investments, but also has the lowest expense
ratio. The Winslow fund also compares favorably to the New Alternatives
fund, since it would take about 9 years for the lower expense ration of the New
Alternatives fund to pay back the cost of the front- end load.
Holdings
The other factors to consider are the funds' holdings. Do they invest
globally? Are they overly concentrated on particular sectors, such as
solar? How much of their money is invested in clean energy?
Unlike some
of the ETFs, all of these funds invest globally. However, reading the
fund descriptions, you will find that the Winslow fund is focused on
"environmentally responsible" companies, while New Alternatives "It
usually invests at least 25% of assets in common shares of companies which have
an interest in alternative energy." In contrast, the other funds are
all at least 80% committed to alternative energy.
Those are just the investment guidelines, however. More important is
how the funds are actually invested. I looked at the top ten holdings of
each, and here is my categorization of their holdings, and here is the breakdown
over major clean energy categories. I combined technologies such as wave
power, batteries,
and geothermal
into the "Other clean energy" category because of the
small amounts held. With diversified renewable energy companies, I split
the ownership between the various categories based on my judgment of how much of
the company was involved in each business.
Top ten holdings can change any time, but this should at least be an
indication of the general thrust of each fund's strategy.
On the assumption that investors are not buying these funds because they want
a fund that is very much focused on clean energy, a fund's investments in the
"Utility" and "Non-energy" categories are mostly
wasted. The utility companies in these funds are the greener electric and
gas utilities, but they still derive the majority of their energy from fossil
fuels. Additionally, I currently expect
regulated utilities to underperform for the next year or two.
In contrast, I think that clean energy investors should strive to emphasize energy
efficiency companies in their portfolios. This is for the same reason
that we do energy efficiency first before installing renewable energy systems on
our house. Energy efficiency measures are much more cost effective.
Most energy efficiency measures pay for themselves in just a few years, and that
is why energy
efficiency features so prominently in the stimulus plan: the economy will
get a short term boost from the spending, but there will also be larger long
term gains from the energy savings over time.
Also because of economics, I prefer investments in Wind
companies to Solar
companies, so despite the large investment of the Winslow fund in two
medical companies and an internet company, I still think it has the best portfolio
of the six, followed closely by the American Trust Energy Alternatives Fund.
My Top Pick
If you can, you are better off buying one of the clean
energy ETFs, or even a portfolio of individual clean energy stocks (here are
10
clean energy picks for 2009.) However, it you want a mutual fund for
the ease of investment, or you are looking to add one to a retirement plan, the
Winslow Green Growth Fund comes out on top with its emphasis on energy
efficiency stocks (including these two Geothermal
Heat Pump stocks), and its lower expenses.
Here's how to invest
in the Winslow Green Growth Fund. Don't forget to read
the prospectus.
Tom Konrad, Ph.D.
DISCLOSURE: The Guinness Atkinson Alternative Energy Fund is
an advertiser on the author's website, AltEnergyStocks.com.
DISCLAIMER: The information and trades provided here are for informational
purposes only and are not a solicitation to buy or sell any of these securities.
Investing involves substantial risk and you should evaluate your own risk levels
before you make any investment. Past results are not an indication of future
performance. Please take the time to read the full disclaimer here.
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