Whether or not your clients are ready to trade in their cars for a conventional hybrid electric vehicle—or a plug-in hybrid electric or full-electric model slated for roll out in 2010—you may be able to help power up their portfolios with companies connected to this greener, cleaner transportation.
Socially responsible mutual funds are investing in direct and indirect green vehicle plays, from battery raw material providers to car and truck manufacturers to companies helping develop a modernized, smart-grid network to accommodate the world’s growing electricity needs.
“We’ve definitely been seeing it as an opportunity here. (Energy) efficiency has been the name of the game lately…now we’re seeing it move to a different level,” says analyst Rebecca Henson who focuses on climate change, renewable energy and energy efficiency for Bethesda, Md.-based Calvert Group Ltd.
Henson, like Bruce Jenkyn-Jones, co-portfolio manager of the Pax World Global Green Fund and director of investments for its London-based subadvisor Impax Asset Management Ltd., expects stronger legislation, smarter technology and economics to drive opportunities for electric-powered vehicles. Approximately 5% to 7% of the Pax World Global Green Fund’s $15 million of assets is invested in technology companies related to hybrid vehicles, with 40% of total assets in alternative energy. “We’re looking across the value chain for companies,” says Jenkyn-Jones.
We’ll get to specific investments in a moment, but first a look at the momentum behind electric-powered vehicles.
By 2015, U.S. sales of these vehicles—including conventional hybrid, plug-in hybrid electric (PHEV) and full electric—are expected to reach 1.4 million units and 8.7% of total light-vehicle sales, says Mike Omotoso, senior manager of powertrain forecasting for J.D. Power & Associates. That’s versus a projected 285,000 units and 2.8% this year. His group—which also projects huge sales jumps in Europe and Japan—expects more than 100 electric vehicle models on the U.S. market by 2015, up from today’s 22.
Major catalysts, says Omotoso, will be the 2016 corporate average fuel economy (CAFE) requirement of 35.5 miles per gallon, anticipated higher gas prices, and competitive pressure for automakers to emulate Toyota’s Prius success. Government entities and corporations are also rapidly expanding their hybrid fleets.
New federal climate change legislation is also likely to support growth of electric vehicles and their necessary infrastructure, says a recent report from Citi Investment Research and Analysis, a division of Citigroup Global Markets Inc. Henson and Jenkyn-Jones, who notes 30% to 40% of global CO2 emissions come from the transportation sector, view global climate change negotiations as a big longer-term positive.
Henson also is encouraged by President Obama’s $3.4 billion smart-grid initiative announced in October. “Getting the grid up to snuff is the biggest hurdle to the plug-in evolution/revolution,” she says.
Stephanie Leighton, co-manager of the $50 million Green Century Balanced Fund and a portfolio manager and chief investment officer for subadvisor Trillium Asset Management Corp. in Boston, anticipates significant technology developments as more engineers shift their focus to renewable energy and climate change. “It’s like ten to 15 years ago when engineers wanted to get involved in computers,” she says.
“We expect to see a growing number of companies formed or more focused on technology needed to produce hybrids or alternatively fueled vehicles,” adds Michael Herbst, a mutual fund analyst with Morningstar, Inc. in Chicago.
Rising fossil fuel prices and falling battery prices will also help, says Jenkyn-Jones. His Global Green Fund holdings include Umicore S.A., a Belgium-based producer and marketer of lithium and cobalt for rechargeable batteries; Polypore Intl., a U.S.-based maker of battery membrane separators; Johnson Controls, a leader in traditional hybrid battery systems which, through its joint venture with France’s Saft Group S.A., has partnered with Ford Motor Co. to develop batteries for Ford’s PHEVs; and Japan’s DENSO Corp., which provides automakers with integration and intelligence for their hybrid vehicle batteries.
Jenkyn-Jones, who says he likes companies that have good relationships with the automakers and “good roots to market,” describes these holdings as “long-term players with good sustainable earnings.” Another favorite of his, though not hybrid related, is BorgWarner, a leader in fuel efficient and reduced emissions vehicle systems.
Jenkyn-Jones doesn’t own but is keeping an eye on Nasdaq-newcomer A123Systems Inc., one of the world’s leading battery developers. Founded in 2001, it completed an initial public offering in September. Although he feels its very high valuation requires big confidence in market growth and its market share, A123Systems is developing faster, less expensive batteries he says could become a “magic step change.”
Automaker Nissan Motor Co.—which is planning a late 2010 rollout of the LEAF, its 100% electric car—is part of Calvert’s Social International Equity and World Value funds. Like Toyota and Honda, “we believe it’s also positioning itself well for a carbon-constrained world,” says Henson.
The Green Century Balanced Fund owns Toyota and Johnson Controls. “They have future earnings growth we can’t even see yet,” and financial strength to continue research and development, says Leighton. Henson likes Johnson Controls, which has been in several Calvert funds, because it’s also involved in making buildings more efficient.
Itron Inc., a leader in global energy intelligence including metering technology, is viewed as a strong infrastructure play by Jenkyn-Jones, Leighton and Henson who have it in their funds. IBM, another key provider of smart-grid technologies for utilities, is held by the Green Century Balanced Fund and 11 Calvert funds.
Down the road when the economy rebounds and IPO activity starts picking up, Henson says she’d look at two new privately held companies—Better Place and Coulomb Technologies—which provide battery charging stations and other infrastructure for electric vehicles worldwide. ChargePoint Network is Coulomb’s expanding web-based system.
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Dorothy 
