The Two Best Green Funds
When Winslow Green Growth fund published a newsletter earlier this year, the headline proclaimed, "This Time is Different." Alternative energy, says manager Jack Robinson, will become a huge part of the global economy -- not fall to pieces again the next time oil prices tumble. Robinson, 65, is a shrewd investor who knows well that that phrase has long been branded "the four most dangerous words in investing." Many have lost fortunes by not heeding that lesson. But this time, things actually do look different.
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Only a handful of socially responsible funds earn their keep. Winslow Green Growth (888-314-9049, symbol WGGFX) is at the top of that list. And Winslow Green Solutions, scheduled to launch in November, holds similar promise.
Green Growth has returned an annualized 27% over the past five years through September 27, putting it in the top 2% among funds that invest in small, fast-growing companies, according to Morningstar. Don't expect sizzling returns like that to continue. But Robinson has returned an annualized 15% on similarly managed private accounts since 1994.
Stomach some risk
Green Growth is risky, to put it mildly. Small, fast-growing companies are volatile to start with. Green Growth generally owns just 25 to 35 stocks, making it riskier. In 2002, the fund lost 38%. I wouldn't put more than 5% to 10% of your truly long-term money in this fund or in a combination of Green Growth and Green Solutions.
Green Solutions will specialize in companies that seek to improve the environment. It will mainly buy stocks of slightly larger companies than Green Growth does. But don't look for low risk in a fund that invests heavily in alternative energy -- a tiny sliver of the economy. Over the past four years, private accounts managed similarly to the way the new fund will be run returned an annualized 19%. Given that record, coupled with the success of Green Growth, it's easy to recommend the new fund.
Green Growth is -- and Green Solutions will be -- different from most socially responsible funds. Rather than merely looking for companies that meet minimum ethical standards, Robinson starts by hunting for companies that, according to his worldview, actually help the environment. Almost 40% of Green Growth's assets are invested in companies that are seeking solutions to environmental problems. Almost all Green Growth's money is invested in such companies. Next, Robinson looks for environmentally "clean" companies. "You can be socially responsible without hurting your bottom line," he maintains. Given the shabby performance of many other socially responsible funds, I'm not so sure.
Socially responsible funds fight with one hand tied behind their backs. That's because they exclude a raft of companies -- including ones that might help them earn the most money. What's more, it has been my experience that the best fund managers are passionate about managing money. Most socially responsible fund managers I've talked to seem passionate mainly about being socially responsible -- however they define that phrase. Robinson is the exception to the rule: He cares a lot about being socially responsible, but he's also driven to earn high returns for his shareholders. [Editor's note: Kiplinger's prefers the phrase "socially screened" to describe these kinds of funds, so as to avoid suggesting that other kinds are "socially irresponsible."]
Clean stock picks
WFI Industries (WFI.TO) "is probably our favorite stock today," Robinson says. The company is based in Fort Wayne, Ind., but its stock trades on the Toronto Stock Exchange. The company produces geothermal energy, mainly for new housing developments. Pipes just five feet underground can pump 55-degree air into houses and small businesses year round -- cutting utility bills and saving energy. The stock, which closed at $28.10 Canadian on October 1, trades at a rich 30 times earnings. Robinson predicts that WTI's earnings will grow 30% annually.
In solar energy, Robinson likes First Solar (FSLR). The company will "soon produce electricity in many parts of the country that is no more expensive that traditional power," he says. First Solar has a huge cost advantage over most competitors because it doesn't employ costly silicon. He expects First Solar to earn 65 cents a share this year and for profits to double next year. The stock leaped 8% on October 1, to $127.01. "It's a very expensive stock, but it's the best company in solar energy."
Fuel Tech (FTEK) is another favorite. It markets two processes for reducing pollution when utilities burn coal or oil. "Not only do the boilers burn cleaner, but the utilities don't have to shut them down for cleaning so they save money," says Robinson. The company has no earnings and trades at nine times sales -- Internet-bubble-type numbers. Robinson thinks sales and earnings will increase 50% annually "for the foreseeable future." Following a 6% jump on October 1, the stock closed at $23.39.
(See 25 Stocks to Invest in a Cleaner World for Kiplinger's green stock picks.)
The soaring price of oil is, obviously, an important factor in the rise of alternative -- energy stocks. Should oil prices plunge, these stocks will likely fall much further and faster than traditional energy stocks because most alternative-energy companies trade at lofty prices relative to their sales and earnings. And concern about global warming is just entering the mainstream.
Could this turn out to be another Internet bubble? Certainly, alternative-energy stocks could tumble. Those of us with a little gray in our hair remember the 1970s, when oil prices went through the roof, only to crash just as unexpectedly. But I think governments and the private sector will pay an increasing amount of attention to global warming. So even if alternative-energy stocks go retreat, I think they'll eventually recover. Green Growth is an excellent way to play this sector. Green Solutions looks just as attractive.
Steven T. Goldberg (bio) is an investment adviser and freelance writer.