Strategy and focus drive differ-ences in performance and prospects among green funds and ETFs.
Being green was easier this year than last, but that doesn't mean environmentally focused mutual funds and exchange-traded funds are playing on a level field as 2009 draws to a close. The extent of the damage from 2008, the strength of the rebound this year, and prospects for 2010 depend largely on how a particular investment fulfills its mission.
In last year's brutal market, smaller companies that dominate the volatile alternative energy space received some of the hardest blows, and the casualty list among alterative energy funds and ETFs ran long. Some lost over half their value in 2008, and many surpassed the devastating 40% decline in the Nasdaq Composite Index.
Noticeably absent this year are runaway rebounds among such offerings. Because they fell so hard last year, some expected an equally powerful bounce-back in 2009. But that hasn't happened, at least so far. The granddaddy of the alternative energy ETF group, PowerShares Wilderhill Clean Energy Portfolio, rose more than 58% in 2006, outperforming the Nasdaq Composite Index by nearly 48 percentage points and opening the door to a flood of alternative energy ETFs. But it lost over two-thirds of its value in 2008 and has been doing only slightly better than the overall market so far this year.
Performance among the growing number of single-industry green alternatives showed that even among a narrowly focused group, investment results can vary widely due to differences in portfolio composition and index construction. Among water infrastructure plays, one of the newest and most popular areas for investment, returns for the first three quarters of 2009 ranged from 11% for PFW Water, a small mutual fund, to 35% for PowerShares Global Water, a popular ETF.
Tough Sledding For Alt Energy
Until credit financing opens up, smaller companies that dominate the alternative energy space are likely to face tough sledding, says Bozena Jankowska, manager of Allianz RCM Global EcoTrends, a mutual fund. In the past, 80% of the alternative energy projects were funded with cheap debt, she explains. But with tighter credit restrictions choking off that source of funding, expansion and growth have proved extraordinarily difficult. At the same time, falling stock prices discouraged venture capital and private equity investments. By late 2008 and early 2009, the extent of the damage became apparent as clean energy companies were forced to postpone or ditch projects and lay off workers.
Rising oil prices won't necessarily help these companies, says Jankowska. "The key to a clear revival will be evidence of available financing. Some money is starting to flow through to these companies from government stimulus packages, and that is encouraging." The U.S. government appears to be moving in the right direction, she says. In July, the Department of Energy outlined the application process to receive grants for renewable energy projects, which she considers "a significant step forward."
As alternative energy companies scramble for funding and await favorable government intervention, other challenges loom. Solar energy has received less government support for projects in Germany and Spain, two former strongholds for solar energy development. At the same time, China has recently flooded the market with inexpensive solar equipment. The new source of competition has driven prices down and put pressure on European manufacturers. Wind energy companies face fewer competitive issues, but still have trouble raising financing.
Longer-term trends for alternative energy offer some encouragement. A report from CleanEdge projects that new installation costs for wind power will grow to $139 billion by 2018, up from $52 billion in 2008. Solar photovoltaics will grow from a $29 billion industry last year to $80 billion by 2018. Although 2009 was a year for consolidation and retrenchment for many firms, the report notes that "new government spending, regulation, and policies should help the sector weather the current economic crisis better than most sectors."
Another optimist is Winslow Green Growth Fund manager Jack Robinson, who believes that alternative energy companies with proven products are in better financial shape than some analysts think. "Credit financing is opening up for companies that have proven technologies and economically viable projects," he says.