Although London's cloudy weather and crowded streets are inhospitable to solar panels and wind generators, Bozena Jankowska manages to reduce her family's carbon footprint by buying wind-generated energy from a local utility, turning the lights off when she leaves a room and walking rather than driving to the store. "Little things like that add up," says the 36-year-old manager of the Allianz RCM Global EcoTrends Fund.

The fund, launched a little over a year ago, reflects its manager's green leanings by investing in companies involved in solar and wind energy, pollution control and other environmental technologies. Although its returns are in negative territory this year, it rose an impressive 61.4% during 2007 and has drawn nearly $166 million in assets.

EcoTrends is one of a growing roster of "clean and green" funds and ETFs that invest in companies working to improve the environment. This asset growth comes at a time when green investing is becoming more mainstream among individual investors, according to a recent survey by Allianz. Nearly half of the investors surveyed say that over the next 12 months they are likely to invest in a company or mutual fund looking to provide solutions to environmental problems, and 17% say they had already made such an investment. At the same time, 73% of those polled say they would consult a financial advisor for insight on environmental investing, although 83% of investors say that their current financial advisors hadn't suggested it.

Many of the new environmentally friendly fund offerings are peppered with established companies, including utilities with strong records of renewable energy development and distribution, or companies such as General Electric and Toyota that have gone the extra mile to develop products that use alternative energy sources. The stocks are often less volatile than pure environmental plays, but the areas that qualify them for inclusion in green portfolios amount to a fraction of their businesses.

Jankowska, who was an environmental scientist before she joined RCM eight years ago to review the environmental practices of the firm's socially responsible portfolios, will occasionally invest in such diversified giants. But her passion is pure-play small and medium-sized environmental technology businesses from around the world that have what she considers a clear road map toward commercialization and a strong resistance to competition due to the high barriers to entry for rivals into their markets. She also seeks companies that have leading market positions, are sustaining earnings, boasting quality management and benefiting from the support of favorable legislation.

The fund's foreign focus also sets it apart. About 65% of its 58 stock positions are in countries such as Germany, Denmark, Spain, China and Norway, and Jankowska may invest up to 50% of her assets in emerging market securities.

The portfolio is concentrated, with nearly half of its assets in its top ten holdings. The stocks have a median market capitalization of $4.4 billion, although some are smaller early-stage companies with short public track records and some are thinly traded. With their sensitivity to environmental legislation, taxes and the price of oil, the stocks in the portfolio can be volatile. So far, the fund's worst three months were from January to March of this year, when the portfolio fell by more than 17%. In its best three-month period, which ended in May 2007, it rose nearly 23%.

"An eco-trends investment would fit into the higher risk category because of the early-stage nature of some holdings and industries," she says. "But investors also have ample reason to consider green investing, including the potential for above-average returns and exposure to an asset class with a low correlation to oil, commodities and the broader markets."

Investors Warming Up

Jankowska cites a number of positive longer-term trends for the group. Foreign countries such as Germany, Japan and Spain are further along on the alternative energy curve than the United States and offer hospitable markets for solar and wind companies. The rising price of oil, which is becoming increasingly difficult to extract from the ground, is making people and some governments more receptive to alternative energy technologies. And the discussion about global warming has shifted from whether it is really happening to how people can remedy the situation.

With the growing focus on environmental business protection, even blue-chip companies are investing in their environmental business practices. And institutional investors such as mutual funds appear to be softening their stance on climate-change shareholder resolutions, according to a report by Ceres. The report, evaluating 2004-2007 proxy votes, shows that historic opposition toward such resolutions is softening, with some fund firms such as Goldman Sachs supporting many climate resolutions outright, and others, such as Fidelity and Janus, abstaining on most or all resolutions after opposing them in the past.

But even as investor interest and support strengthens, companies involved in alternative energy face significant hurdles, particularly in this country. Congress has been debating for well over a year about whether to renew the investment tax credit to stimulate investment in solar energy and the production tax credit for investments in wind energy, both of which are set to expire at the end of 2008. Such credits are critical to the expansion of the clean power industry. In a recent interview in The New York Times, Rhone Resch, president of the Solar Energy Industries Association, said that if the credits expire in 2009, the industry would lose $20 billion worth of investments.

Although the failure to reach an agreement on tax credits clouds the outlook for those industries, Jankowska says that a separate bill later this year could extend the credits, and there is strong support for incentives at the state level. "I don't think the U.S. is as slow in adapting to alternative energy as some people think," she says. "There is a huge build-out in the U.S. and China, particularly in wind power generation. Eco-trends is one of the few sectors where public and political support is lined up with the notion that action needs to be taken sooner rather than later, and that lays the groundwork for great investment opportunities."

Wind Is In, Ethanol Is Out
    Jankowska cautions that the green tide will not lift all environmental technology boats. "I am negative on the ethanol space and am not a believer in the sustainability of these companies," she says. "It is not a green manufacturing process because of the environmental impact of growing corn. And demand for biofuels is raising corn prices, which squeezes the profit margins of ethanol manufacturers." The political climate in Europe is also lukewarm toward biodiesel fuels that rely on plant oils derived from rain forest trees.

She is much more optimistic about wind power, both from an ecological and business perspective. The federal tax credit issue casts a longer shadow over solar power than wind power, she says, because the latter form of energy has more support from state level mandates. Although she sees favorable long-term prospects for solar energy, she is "far more positive about wind. It's a cheap and fast form of energy." Utilities are also more rapidly committing to investing in wind energy development than to solar.

Denmark-based Vestas Wind Systems, the fund's top holding at nearly 10% of assets, has played an active role in wind power generation since 1979 and employs more than 15,000 people. The company's 23% market share makes it the biggest player in the growing global wind power market. Vestas expects that the present wind power share of about 1% of global power consumption will grow to at least 10% by 2020.

Spain's Gamesa, another major name in the wind power industry, recently opened its first plant outside of Spain, in the U.S., and will soon launch other factories in China and Portugal. The company is also involved in developing photovoltaic solar energy and biofuels. Fund holding First Solar, the largest solar company in the U.S., recently opened its newest factory in Germany to take advantage of the country's booming solar market.

In addition to alternative energy, the fund also invests in companies involved in pollution control, recycling and waste management.
Another fund holding, the U.S.-based company Stericycle, offers services such as medical waste disposal management; product recalls and retrievals; OSHA compliance training; pharmaceutical and medical device returns; and pharmaceutical waste disposal. Denmark's Novozymes makes enzymes and micro-organisms for a wide range of uses, including biofuel production. Its latest innovation is Celluclean, a new technology for the detergent industry that offers an environmentally friendly alternative to bleach that is less damaging to clothes. Another top ten holding, LKQ Corporation, is the largest U.S. provider of recycled light vehicle original equipment manufactured products and the second-largest nationwide provider of aftermarket collision replacement products and refurbished wheels.

Investors pay a price for the fund's focus on off-the-grid, off-the-radar-screen companies by having less liquidity. So that Jankowska can have more management flexibility to invest in smaller, less liquid securities, the fund is set up as an "interval fund." This means that, instead of providing daily redemptions, it makes quarterly repurchase offers for between 5% and 25% of outstanding common shares at net asset value. Shares can be purchased daily at net asset value, with the applicable sales charges.