2 Great Green Funds
Clean technology will gradually replace fossil fuels. Here’s how to profit from that long-term trend.
Hundreds of years ago, coal was considered an alternative energy. As the price of firewood in Europe, especially in England, soared in the 1600s, improvements in coal-mining technology helped bring down the cost of producing the black rock and made it cheaper to burn than wood.
The same thing happened with oil. Whale oil was the main source of lighting in the U.S. until the late 1800s. But New England’s whaling fleet depleted the herds, propelling whale-oil prices skyward. In 1858, Edwin Drake discovered oil in Pennsylvania. By 1900, whale-oil lamps were collector’s items.
Steven Leuthold, the veteran market strategist and money manager, says the same kind of energy revolution is under way today. “The negative impact [of fossil fuels] on the environment, including the air we breathe, is a fact even if the root cause of global warming is certainly arguable,” he says. “In addition, the world’s oil, gas and even coal reserves are finite and increasingly expensive to extract and deploy.”
Leuthold’s Minneapolis-based firm sponsors one of two green-tech funds I find especially compelling. Last July, it launched Leuthold Global Clean Technology (symbol LGCTX), the first Leuthold fund that doesn’t rely primarily on the firm’s computer-driven market- and sector-timing models. It’s a more conventional fund that employs old-fashioned stock picking.
Co-manager David Kurzman, 35, does much of that stock research. The fund uses Leuthold’s computer screens, but Kurzman spends most of his time studying company financials, products and executives. Kurzman joined Leuthold last year after ten years in green tech, first as a brokerage analyst and later running a hedge fund.
Kurzman says he hunts for “best in class” stocks. He wants fast-growing companies, those with revenues rising 20% or more annually. “This is a true growth fund,” he says.
The transformation to clean technology, he says, “is a multi-decade event. You don’t put an infrastructure like this in place in ten years.” But numerous factors -- including the Obama administration’s 30% tax credits for clean tech and China’s search for green energy -- are spurring innovation. About half the fund’s stocks are based overseas.
Halfway across the country, in Boston, Jack Robinson has devoted his career to socially responsible investing, with a strong emphasis on green tech. All the companies in Winslow Green Solutions (WGSLX) are, in Robinson’s view, working toward making the world a better place, not merely avoiding doing harm. Like the Leuthold offering, Green Solutions is a growth fund. Robinson, 67, has invested about 35% of the fund’s assets in foreign stocks. “More companies and more governments are taking steps toward embracing green technologies,” he says.
Green Solutions and its older sibling, Winslow Green Growth (WGGFX), which focuses on stocks of even smaller companies, have been streaky. Green Growth’s 61% loss in 2008 pretty much wiped out all of the profits the fund produced since its 2001 inception. But it returned a sizzling 43% over the past year through January 29.
Like Leuthold, Robinson is a canny veteran. He’s one of the few socially responsible managers I know who both possesses the smarts and spends the endless hours necessary to stay on top of this rapidly evolving sector. Most socially responsible managers are passionate -- about being socially responsible. Robinson is also passionate about picking winning stocks.
Make no mistake: Both the Leuthold fund and Green Growth are highly risky. As green tech matures, I’d expect them to become less volatile. Right now, they invest largely in stocks of midsize and small companies.
The big question mark for both funds: Is green technology for real this time, or is this the 1970s all over again? Alternative energy was the rage for a time in the ’70s as the price of oil skyrocketed. But oil prices eventually deflated, and consumers and investors quickly lost interest. Many companies went bust.
This time feels different. More government funds and venture-capital money are going into clean tech. The sector has more sex appeal, which has attracted top-notch scientific and managerial talent. In the ’70s, moreover, the Arab oil cartel was the big driver of high prices. Because of widespread cheating on the part of its members, the cartel failed to keep production low.
Today, the main impetus for green tech stems from rising energy demand -- particularly from emerging markets, such as China. That trend is unlikely to dissipate. “There are so many reasons to get off oil and use less energy,” Robinson says.
But this could always be another false start -- particularly if breakthroughs in production of conventional fuels continue and if concern about global warming subsides.
Another possibility: Large, diversified companies may be responsible for the most important breakthroughs. Behemoths such as General Electric and Siemens are already big players in green tech. But, as Kurzman says, clean-tech contributions are little more than “a rounding error” on the earnings statements of these giants. Neither Kurzman nor Robinson invests much in large-cap stocks.
Don’t put more than 10% of your stock allocation in this sector. My hunch is that Green Solutions will turn out to be the better performer, but a good option might be to split your money between the two funds.
Both funds are no-load, but unfortunately they charge excessive fees. The annual expense ratios are 1.40% for Green Solutions, 1.85% for Leuthold. That’s outrageous, but in this particular instance I think investors should swallow hard and pull the trigger because this sector -- unlike anything since the Internet -- holds the promise of truly changing the world.
Steven T. Goldberg is an investment adviser in the Washington, D.C., area.