Green energy indices blossom

PORTFOLIO POINT: A string of new stockmarket indices is making it easier for investors to track sector performance.

The worldwide growth in environmental investment has also brought a boom in stockmarket indices to measure the performance of the sectors and companies. This is good news for direct investors in international environmental equities.

These indices take the hard work out of identifying the key stocks in their sector, and how the sectors have been performing. They also give a benchmark to measure personal investment performance.

Some of the indices, such as S&P’s Global Water Index, have already been made available for investment by enterprising investment houses; while others such as the index of photovoltaic stocks are likely to remain just a gauge of sentiment and performance for some time yet.

The adage that most investment opportunities are overseas is equally true for environmental stocks, particularly sectors such as solar, geothermal and water that in Australia are either immature or not well represented on the ASX.

Another factor that may attract the interest of investors is the increasing affordability of overseas investments as the Australia dollar appreciates against the US dollar and the euro, which means investors can buy more shares with the same amount of capital.

For individual investors, the new indices overcome some of the key hassles of investing internationally. By providing a universe of stocks and the leading stocks for each sector, they are an excellent place for investors to start researching which stocks suit their investment strategy, and to get a realistic idea of the returns they can expect.

The indices are available for specific industries and geographies as well as for themes, such as climate change and alternative energy.

Below is a synopsis of some of the leading indices for the main environmental sectors. As each index has its own methodology for selecting stocks and measuring performance, investors should take the time to understand them.

Solar energy

The PPVX, or Photon Photovoltaic Stock Index, is published by the German magazine Photon International. The index comprises the 30 leading photovoltaic stocks from around the globe, which have more than 50% of their previous year’s sales from pohotovoltaic (PV) products or services.

It includes high-profile stocks such as First Solar, Q-Cells, Suntech Power, Renewable Energy Corp, Conergy, Sun Power, Solar World and Phoenix Solar. The stocks come from a wide range of countries including the US, Germany, China, Canada, Spain, Taiwan, Switzerland, Japan, the UK, Norway and Hong Kong.

Their products include photovoltaic wafers, cells, modules, systems and production equipment. The index is divided into six levels of capitalisation and weightings so that a few of the largest companies do not dominate the results. It is calculated weekly on a euro base.

The index began on August 1, 2001, at 1000 points; on October 30, 2009, it was on 2010 points.

The Ardour Solar Energy Index covers 29 stocks and goes beyond photovoltaics to include concentrated solar power, solar thermal power, solar integrators and related technologies. But at present the first 17 stocks are also in the PPVX Index and it is only at the 18^th position by weighting that the first solar thermal stock appears: Solar Millennium AG of Germany. The Ardour Solar Energy Index also adds some alternative lower-cap photovoltaic stocks than the PPVX Index.

Ardour also publishes a Global Alternative Energy Index, with 112 stocks. This includes the major stocks in solar, bio energy, wind, hydro and geothermal power, plus distributed energy, energy efficiency, enabling technologies and environmental technologies such as water and wastewater treatment, air quality and cleaner coal.

Wind energy

The Nasdaq OMX Clean Edge Global Wind Energy Index (QWND) covers 38 stocks, which are classified as producers, distributors, or manufacturers of wind energy and wind turbines.

Stocks are based on a modified market capitalisation index, and classified as pure play or multi-national. Pure plays are given a collective weight of 90% and multinational securities a collective 10%. To qualify, a multinational must have more than $US1 billion revenue from wind-related activities or own or operate more than 1000 MW of installed wind capacity. Note this may still comprise a minority of their business activities.

One goal of the index is to give a benchmark for liquidity. Thus stocks must have a minimum market capitalisation of $US100 million, a minimum three-month average daily trading volume of $US400,000, and pass Clean Edge’s qualitative criteria.

Stocks include well known names such as Vestas Wind Systems, Suzlon Energy, Gamesa Corporacion Tecnologica, Acciona and Australia’s Infigen Energy. Multi-national stocks include ABB, AES, GE and Siemens.

The index began on June 26, 2008, at 250 points and has fallen 32% since inception. Investors who want to buy the index can do so through the PowerShares Global Wind Energy Portfolio. The fund invests at least 90% of its assets in securities and depository receipts in the index.

Smart grids

The world’s first index to track smart grid and electric infrastructure companies is the NASDAQ OMX Clean Edge Smart Grid Infrastructure Index (QGRD). The index is global and includes companies that are primarily involved in electricity grids; electric meters, devices and networks; energy storage and management; and enabling software used by the smart grid and electric infrastructure sector.

It was launched only on September 22 this year and covers 29 securities from nine countries.

It is a modified market-capitalisation index. Securities classified as pure play or diversified. Pure plays are given a collective weight of 80% and diversified securities are given a collective 20%. Pure plays must receive at least 50% of their revenue from smart grid, electric infrastructure, or other grid-related activities, while the diversifieds must receive 10–50% or $US1 billion in revenue from smart grid and grid infrastructure activities.

QGRD’s goal is to act as a transparent and liquid benchmark for companies in this sector. Securities must have a minimum float-adjusted worldwide market capitalisation of $US100 million, and a minimum three-month average daily dollar trading volume of $US500,000.

The index began with a base value of 250 points.

Water management

The S&P Global Water Index is made up of the 50 largest listed companies involved in some aspect of the water business around the world, and is divided equally between water utilities and infrastructure, and water equipment and materials.

Selection criteria include a minimum market capitalisation of $US250 million and a liquidity requirement of a three-month average daily trading volume above a current threshold of 10,000 shares. Weightings are driven by size but no stock can have having a weight of more than 10%.

Companies need not be pure plays. Those whose primary business is water are given a rating of 1.0; stocks with multi-industry activities, including significant water exposure, are given a rating of 0.5. This may explain why Australian engineering firm WorleyParsons is in the index. The methodology does not quantity “significant water exposure”. The third category is marginal water activities and such stocks are not included.

The 50 stocks in the index are from a large number of countries in Europe plus the US, China, Japan and Brazil. The index base date is November 16, 2001, and the base level 1000 points. On October 30 this year the index was at 1921 points. The total return including price plus gross cash dividend was 2378 points. Investors can access the index through an ETF run by the financial services company Claymore.

Another water index is the DaxGlobal Water Index of companies with more than 30 per cent of revenues from water supply, irrigation and sewage treatment. Bioenergy

The World Bioenergy Index (BIOX) includes the 10 most representative companies in bioethanol, waste materials and organic biogas. Index constituents are ranked by their free-float market capitalisation and market liquidity. Stocks include Australia’s Energy Developments.

The BIOX is calculated by Dow Jones and compiled by SAM Group. The inception date is May 26, 2006.

General clean energy indices

A large number of general clean energy, alternative energy and climate change indices have also emerged. These can be useful for identifying the major players across a wide range of sectors.

They include:

• Nasdaq Clean Edge Green Energy Index. Tracks the performance of companies that are primarily manufacturers, developers, distributors, or installers of clean-energy technologies.
• Wilderhill Clean Energy Index (Eco). Tracks businesses that can benefit substantially from the transition to cleaner energy and conservation and pollution prevention. However these must be listed on a major US exchange or have their American Depository Receipts listed on one of these. Lesser known sectors it includes are energy storage, energy conversion, greener utilities and smart power management.
• DAXGlobal Alternative Energy Index. Comprises the 15 largest alternative energy companies in the world. These are made up of the three largest companies in each sector of wind energy, solar energy, natural gas, bioenergy and geothermal energy.
• S&P Global Clean Energy Index. Thirty of the largest companies in global clean energy-related businesses.
• S&P Global Eco Index. Thirty of the largest public companies in ecology-related industries.

There are many others but sectors that are less well represented or seem to not yet have their own global index are geothermal energy, hydro energy and ocean energy.

Victor Bivell is the editor of Eco Investor.