Why Alternative Energy and Green Funds are Underperforming

For the Year They're the Worst Among Socially Responsible Mutual Funds
By William Donovan, About.com

A rising tide may lift all boats, but an economic tsunami swamps them. That certainly has been the case this year for mutual funds in the green and alternative energy sector. The combination of the credit crunch and the dive in oil prices has meant a swift turnaround for a segment of stocks that was flying high just three months ago.

According to Morningstar Inc., on a total-return, year-to-date-basis through Oct. 31, the eight worst performing mutual funds among the 152 funds in its socially responsible investing group were all green funds. The Guinness Atkinson Alternative Energy Fund was down the most, off 64.25 percent through October. It was followed by the Calvert Global Alternative Energy Fund, down 60.07 percent and the Winslow Green Growth Fund, down 59.39 percent. They compare with the best performing SRI fund, the CRA Qualified Investment Fund, which managed a gain of 1.89 percent through October.

“It’s incredibly galling to have a fund that’s down 60 percent for the year, but you take the rough with the smooth,” said Edward Guinness, manager of the Guinness Atkinson Alternative Energy Fund, from his office in London. “The energy sector has always been highly volatile and the alternative energy sector is going to be moreso.”

While these funds have been dragged down by the overall market collapse, they also have their own unique burdens:

Oil is down and so is the urgency.

When the price of oil was climbing earlier this year, there was an equal surge in interest in solar, wind and hydro power. But as the cost of a barrel of oil has fallen from a peak of about $145 in July to below $60, so has the urgency to find alternatives.

“There’s been a very dramatic correction in renewable energy stocks and energy conservation plays,” says Matthew Patsky, a fund manager with Winslow Green Mutual Funds. “Part of it is directly correlated to the reversal in fossil fuel prices.”

Take Vestas, for example, the Danish wind energy company. Fluctuations in its shares have tracked oil. After oil topped out in mid-July, shares of Vestas hit their high in mid-August at about $119 per. As oil fell, so did Vestas. By late November it was trading at around $33 per share.

The credit crunch has created uncertainty.

Unlike the early 1990s when there was a bubble in the emerging alternative energy market, today’s industry is more mature. Analysts say companies have orders in the pipeline and contracts in place. But as with other sectors, investors are waiting for the banks to start making loans again.

This has been a particular problem for alternative energy stocks, who often sell themselves as long-term investments to hedge against an eventual world oil shortage. With markets around the globe in the midst of an historic freefall, attention has centered on daily triple movements and not company prospects years ahead.

“The global markets shut off because of lack of credit starting in mid-September,” says Patsky. “There’s still plenty of business going on with people completing projects that are in progress or that they had already lined-up financing for. But what about the future.”

Green funds are suffering as growth stocks.

Green funds are typically made up of smaller companies whose revenues have the potential to grow at a rapid pace. Investors are willing to pay more in terms of share price for that growth potential, rather than buying more stable companies growing at slower rates. With many economists saying we’re in a global recession, it has become much more difficult to estimate those accelerated earnings. That lack of confidence has meant a pull back from growth stocks.

“We’ve seen a huge number of stocks that have very exciting long term potential trading under 10 times earnings,” says Guinness, who said that figure was above 20 for many stocks earlier in the year. “People are thinking about what will happen in the very near term and they don’t believe the earnings forecast numbers.”

Among the other funds in the bottom eight were the Allianz RCM Global Economic Trends Fund, Winslow Green Solutions Fund, Robeco SAM Sustainable Climate Institutional Fund, New Alternatives Fund and DWS Climate Change Fund. All were off between 54.8 percent to 48.92 percent for the year through October.

While recognizing their funds have been hammered, both Guinness and Patsky believe there are many positive reasons to invest in green funds for long term investors. They include the climate crisis, energy security and projections that the world is headed for a shortage in oil in the not-to-distant future.

“We take the view that the next six months will have presented, in hindsight, an incredible buying opportunity,” says Guinness. “Is today the right day or is the right day in three months time? I really don’t know. But whether you end up buying today or in three months or six months, it will probably prove to be a good time to have bought.”