The clean funds that are cleaning up

Funds that specialise in green power stocks are doing well - such as the US New Alternatives Fund, up 35% over the past year - although the sector still presents volatility risk.


There's little consensus among developed and emerging nations on how to effectively deal with climate change and reduce the amount of greenhouse gases, but there is agreement on one aspect of this global threat: Trillions of needed dollars will continue to pour into renewable and clean sources of energy, transportation, building and manufacturing.

Although investors have typically focused on a small group of "clean tech" funds and stocks, you can cast a wider net to capture the upside of this influx of investment. Nearly every company in the S&P 500 Index has some involvement in "greening" their operations from recycling to creating their own sources of clean energy.

Take wind power. The retailer Ikea recently announced it was buying a wind farm in Illinois. Microsoft Corp is purchasing a Texas wind facility. Facebook, Google and Wal-Mart are also investing in the technology.

On the solar power front, solar panel prices have plummeted and there are a host of collateral technologies such as battery storage, energy management systems and co-generation that deserve attention.

One of the oldest and most diversified mutual funds in this sector is the New Alternatives Fund, which is up 35 per cent for the last 12 months through April 17 and up 8 per cent year to date, compared to just under 1 per cent for the MSCI EAFE index. The fund is expensive to own, though, charging a 1.1 per cent annual management fee and 4.75-per cent initial sales charge.

The New Alternatives portfolio samples several companies from the clean tech sector, holding industry leaders like Vestas Wind Systems, Johnson Controls and American Water Works.

A less-costly fund to own is the PowerShares Cleantech ETF , which holds ABB, Corning and Siemens, companies with several stakes in broad-based energy businesses. The fund charges 0.67 per cent annually for management expenses. It's up 33 per cent for the 12 months through April 17.

Landscape for green power

Falling costs of alternative energy products in recent years are enhancing the potential of clean energy technologies and displacing "dirty" power plants.

According to a recent report by the consulting firm McKinsey & Company on solar energy, the drop in price residential consumers pay in the United States to install rooftop solar systems means "These cost reductions will put solar within striking distance, in economic terms, of new construction for traditional power-generation technologies, such as coal, natural gas, and nuclear energy."

As one of the smallest sub-sectors in the overall economy, though, clean energy has been volatile. And price wars in solar cells have turned leading solar companies valuations into roller coasters. US company First Solar's stock price, for example, was in negative territory from 2009 through 2012, then skyrocketed 77 per cent last year. The company is up 27 per cent year-to-date through April 17.

Take heed

Even investing through a diversified index fund like the PowerShares ETF is going to be rocky. The fund has a five-year volatility measure of nearly 22, compared to about 16 for an MSCI World stock index. It also lost half of its value in 2008.

If you're going to invest in this sector, stay away from concentrating your holdings in single stocks. While the climate for these stocks looks good at the moment – and will certainly pay dividends over time – the short-term outlook could change rapidly.

This is an edited extract of an article originally published by Reuters. Reproduced with permission.

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