Markets & Finance

Green Funds: Less Than Meets the Eye


Ways to invest in environmentally focused vehicles are still limited, and portfolios may harbor a few surprises—like oil and casino stocks

Green investing isn't such a lonely pursuit anymore. With society's greater emphasis on renewable energy sources and technologies to limit greenhouse gas emissions—witness Al Gore's conquering-hero status at this year's Oscar awards as he picked up a statuette for his climate change documentary An Inconvenient Truth—there is increasing attention paid to this approach.

Unfortunately for investors, mainstream enthusiasm for green companies doesn't always translate into the green that lines wallets. But green is a term that's open to interpretation. Take General Electric (GE). Although the conglomerate has a leading position in green energy like wind power, some of its operations infuriate environmentalists. Meanwhile, small pure-play companies can't turn a profit. Wading into the green pool, investors may find it safer to play diversified indexes and mutual funds rather than pick out the eventual winners in a crowded field.

There aren't too many green stock indexes, ETFs, and mutual funds available to American investors. More surprisingly, funds that proclaim themselves eco-friendly sometimes have radically different investing philosophies. And because renewable fuels still hold a tiny share of the market compared to, for example, oil companies, their shares can be wildly volatile. Entering the fray, Standard & Poor's last week started the S&P Global Clean Energy Index. (S&P is owned by BusinessWeek.com parent The McGraw-Hill Companies(MHP).)

"Like a lot of investments it depends on who you are and why you're using them," says William Rocco, an analyst with Morningstar (MORN). He think green investing vehicles work best as smaller riskier bets—the spice to an otherwise solid portfolio—warning that "trendiness in these kind of things makes me worried."

To help sort the out the opportunities in this intriguing corner, this week's Five for the Money takes a look at some of the options out there. As usual, investors should be careful: Saving the planet and improving your retirement aren't necessarily compatible goals.

1. Sierra Club Stock Fund

When investors think of mainstream green investing, the Sierra Club Stock Fund (SCFSX) is probably pretty close to what they have in mind. The fund filters almost 2,000 large companies according to rigorous criteria. It eliminates companies involved in practices including nuclear power, tobacco, fossil fuel extraction, and agricultural practices like "concentrated animal feeding" and developing genetically modified organisms.

Of the few hundred names that survive the screen, the fund picks out the largest 100, according to Garvin Jabusch, director of sustainable investing at Sierra Club Mutual Funds.

As in many green funds, smokestack-free sectors like financials, health care, and tech feature heavily in the portfolio. But taking a look at some of the largest holdings can help explain why green investing isn't so cut-and-dried. As of Jan. 31, two of the largest five holdings in the portfolio were casino giants Las Vegas Sands (LVS) and MGM Mirage (MGM). Even for those socially conscious investors willing to invest in gambling, one could argue that the choices look counterintuitive. Without major online operations, these companies' revenues depend on millions of tourists flying and driving long distances, each contributing their bit to climate change. It also doesn't consider the juice needed to light the Las Vegas strip. This would seem to contradict the fund choosing to hold no car manufacturers and only one airline, Southwest (LUV).

2. PowerShares WilderHill Clean Energy

Without fossil fuels or mining outfits, the Sierra Club fund is missing out on a major slice of the economy, even if it is a sooty one. For exposure to energy it has a small stake in PowerShares WilderHill Clean Energy (PBW), an exchange-traded fund with wide exposure to some of the new technologies.

Jarbusch assumes that eventually renewable energy will boom. However, "it's very difficult to pick out not just the companies that are going to be the biggest winners but even the industries that are going to be the biggest winners." With exposure to more than 40 companies in areas like ethanol, solar power, and fuel cells, this clean-energy fund is playing the field before some of them have even turned a profit. In addition to holding small companies in a specialized space, the fund price tends to fluctuate with oil prices. Not for the faint of heart.

3. Green Century Balanced Fund

The Green Century Balanced Fund (GCBLX) is a more conservative option. This mutual fund screens out fossil fuel and nuclear energy companies while seeking to inject money into those outfits striving to improve their practices and develop cleaner technologies.

"Renewable energy is becoming a very real industry" says Eric Becker a portfolio manager for the fund from Trillium Asset Management. "It's only going to get better." Even so, Becker acknowledges that it hasn't anywhere near the type of presence as traditional energy producers.

The fund tries to provide a solid holding that will capitalize on growing sectors like solar and geothermal energy. As of the end of 2006, it had an average annual return over the last five years of 2.9%, after fees. Perhaps reflecting increased interest in renewables, last year the fund saw a 7.75% return.

4. iShares KLD Select Social Index

At the moment socially responsible investing covers far more than green investing. There are various so-called socially responsible instruments that do everything form omitting alcohol and tobacco companies to favoring outfits that offer strong benefits packages. Some tilt more toward the environment. Of these, investors might want to consider the iShares KLD Select Social Index (KLD), which aims to mimic the Russell 1000 index with a stronger green emphasis than socially responsible peers.

Morningstar analyst Marta Norton says this nod toward green is a stronger foundation than, for example, a basket of volatile green-energy stocks. Norton says she has "no inherent bias" against the renewable energy sector but "in the ETF world some of these narrower-sliced funds will be a little tougher to hold." As is typical for a mainstream socially responsible fund, KLD leans heavily on the tech and financial sectors.

5. Claymore LGA Green ETF

To many, this green exchange-traded fund (GRN) won't sound green at all. The fund tracks the performance of the Light Green Advisors's Light Green Eco*Index, which attempts to produce an environmentally sound stock index weighted toward the best performers in each sector of the economy. Theoretically, at least, it can play the same part in a conservative stock portfolio as a standard index fund. To do that the index has to make some controversial choices.

Many green investing products eschew fossil fuel companies entirely, but the Light Green index is weighted more on Exxon Mobil (XOM) than any other company. For many environmentalists, the oil giant is a poster child for industry-trampling ecology. Jonathan Naimon, managing director for Light Green Advisors, says "we're more interested in environmental performance than environmental speech." Despite the company's soiled reputation—a lasting residue of the 1989 Valdez spill—Naimon says Exxon's environmental practices are better than those of competing energy behemoths. And he argues that it's naive for even a green fund to ignore the energy business. "The oil industry is real," Naimon says. "It's a major part of the world."

Wal-Mart (WMT), another company notable for its absence from most green funds, is also in the index's top 10. As a whole, Naimon says, companies with good or improving practices should be rewarded. Of course, the presence of Exxon and Wal-Mart shows that even eco-conscious funds may have to wander from the greenest fields to find decent returns.


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