What It Means to Be Green

You wouldn't expect to find Valero, the nation's largest oil refiner, among the holdings of an environmentally conscious "green" fund. Such funds tend to avoid energy and mining companies because they pollute. But Valero, along with Diamond Offshore Drilling and mining giant Freeport-McMoRan Copper & Gold were all recent holdings of Spectra Green, the newest addition to the Alger fund lineup.

Launched at the end of 2006, Spectra Green invests in fast-growing, innovative companies of all sizes that have shown "a commitment to environmental sustainability," according to the prospectus. Look up Spectra's ticker symbol (SPEGX) and you'll discover that its record reaches back to 2001. That's actually the record of the fund's predecessor, Alger Socially Responsible Institutional. Zachary Karabell, Spectra's chief economist, says the fund was reconceived to focus on environmental issues and take a more "dynamic" approach to socially screened investing.

That translates to looser standards on what constitutes a "green" investment. Most socially screened funds rigidly avoid entire industries, such as energy, tobacco, firearms and alcohol. Karabell argues that such stringent screens ignore companies within those industries that are taking steps to improve their environmental records. "We live in the real world, not the ideal world," he says. "Simply not investing in industries where you find pollutants does little to advance the needle."

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Rather than focus on what companies are doing wrong, Spectra considers what they are doing right. For example, Valero made the cut because of its strides to reduce sulfur emissions and produce cleaner-burning fuels.

Buy and sell ideas come from a team of 30 research analysts, each of whom specialize in a specific industry for this and other Spectra funds. Co-managers Fauzia Rashid and Christopher Walsh then make the final call on what goes into the portfolio. They look for fast-growing companies with accelerating revenue and earnings growth. Then they use the environmental screens, which Spectra contracts out to a research firm. "More than anything else, we're a growth manager with a green skew," says Karabell.

Since the beginning of 2007, the fund, which charges 1.25% in annual fees, has returned 5%.

Spectra Green isn't the only socially screened fund that's been relaxing its criteria. In October, the oldest socially screened fund, Pax World Balanced (PAXWX), abandoned its zero-tolerance policy on alcohol and gambling. Calvert, a Bethesda, Md., fund family, is considering broadening its screens for nuclear power companies, since some electric utilities have developed alternative energy programs.