With representatives from nearly 200 countries hunkering down this week in Copenhagen, Denmark, for the Summit on Climate Change, the tendency to dwell on Earth-saving causes and carbon footprints is understandable and even noble.
With representatives from nearly 200 countries hunkering down this week in Copenhagen, Denmark, for the Summit on Climate Change, the tendency to dwell on Earth-saving causes and carbon footprints is understandable and even noble.
But putting real money on the line to try to tap into the investment potential of the latest green movement might be taking things a bit too far.
Setting aside for the moment such distractions as the celebrated Copenhagen gathering, and even the recent flap over leaked e-mails suggesting that some climate scientists might have fudged the data, the case for serious green investing is simply not there yet.
No matter how you try to invest in the trend toward alternative energy and various environmental campaigns, the path is fraught with risks ranging from geopolitics to pure economics.
This isn't to suggest that money hasn't been made investing in green strategies, but financial advisers need to be aware of the various shades of green investments that are emerging. And at this point in the development of many of these industries and technologies, advisers should approach green investments as they might any strategy with an un-proven track record.
Morningstar Inc. doesn't have an official category for green investments, but its research has identified 38 mutual funds and exchange-traded funds under a secondary category screen.
Of those 38 funds, 22 have been launched since 2007, which is actually more reflective of an earlier green investing movement than it is the current focus on alternative energy and conservation.
“Piggybacking off a movement toward green energy in Europe a few years ago, solar and wind energy in particular were viewed as high-growth areas and received a lot of media attention,” said Morningstar analyst Michael Herbst. “Between 2004 and 2007, these types of investments did well, but then they sold off in early 2008.”
This year through the end of last month, the green funds identified by Morningstar have offered a mixed bag of performance accompanied by an overriding theme of lackluster interest from investors.
The SAM Sustainable Climate Fund (SSCIX), for example, gained more than 45% this year through November yet had gained less than $500,000 in net inflows and has less than $4 million in total assets.
One of the larger and older mutual funds in the category, the $100 million Sentinel Sustainable Growth Opportunity Fund (WAEGX), which has been around since 1994, gained almost 27% through the first 11 months of 2009 but experienced more than $10 million in net outflows.
The S&P 500 gained 21% during the same period.
Even though both these funds outperformed the broad market, their failure to gain real traction, especially during a time of intense focus on the environment, says a lot about the challenges that green investment strategies face.
At this point, many of the mutual funds are still so small that the resulting above-average expense ratios will keep some investors away.
But fully understanding the opportunities these funds present requires a look at what they are up against, and that's where politics collide head-on with business fundamentals.
“Right now, political risk is shaping the green-investing environment, and the private sector has to get comfortable with investing in the kinds of projects that could take 10 years to fully develop,” Mr. Herbst said.
Even if investors get behind the Obama administration's agenda favoring the development of alternative energy, Mr. Herbst pointed out that there is no guarantee that those policies will be in place long enough for the technology and new industries to develop fully.
Aside from health care, there is perhaps no industry more sensitive to political debate than companies associated with alternative energy and the environment.
Something as straightforward as a wind farm, for example, can represent significant risks when you consider the time and resources it takes to acquire the land and equipment, in addition to the uncertainty of finding a market for the energy 10 years down the road.
This kind of uncertainty and volatility is reflected in the performance of First Trust Global Wind Energy (FAN), an ETF that tracks the ISE Global Wind Energy Index.
Year-to-date through last month, the ETF had gained 22% but was down more than 47% from its June 2008 launch.
The S&P, during the same 17-month period, was down just 14%.
The story is similar for Claymore/MAC Global Solar Energy (TAN), an ETF that tracks the MAC Global Solar Energy Index.
“These things seem to be popular in spurts,” said Jim Porter, managing member of New Century Management LLC.
Mr. Porter, who uses a quantitative trend-following strategy to monitor investment patterns, sees “no indication of capital flows” into green investments right now.
