Rising oil prices may also be a harbinger of better times. While last year unraveled the presumption that such pricing increases are always good news for alternative energy stocks, they could provide support for a rally at some point.

Gaining Traction
More diversified green funds that found a shallower bottom in 2008 did not have to climb out of so deep a hole as many of those with a narrower focus.  Portfolio 21, a mutual fund that invests in a wide swathe of larger companies with particularly strong environmental criteria, outperformed the Standard & Poor's 500 Index last year and is doing so again in 2009. Green Century Equity Fund, which screens for the most environmentally responsible companies on the FTSE KLD 400 Social Index, has also proved less volatile than more narrowly focused funds and is also beating the index.

With a presence in a broad range of sectors such as waste and water management, environmental services and green building provided some diversified funds with a support net last year and are giving them a boost in 2009. While all these companies have a common denominator of environmental emphasis, they represent a diverse range of businesses and sectors. Some stocks in fund portfolios, such as recycling companies and green building products manufacturers, fall into the cyclical industrial category. Other sectors, such as alternative energy, represent special situation growth opportunities.

One diversified green fund, Winslow Green Growth, returned to form in 2009 after a sharp downturn last year battered many of the small-cap stocks it invests in. Stock of top holding LSB Industries, whose subsidiaries specialize in chemical and climate control products, nearly doubled from the beginning of 2009 through mid-September after a 70% plunge in 2008. Renewed demand for raw materials also drove stock of leading metals recycler Sims Metal Management higher. Other top performers in the portfolio include energy technology company American Superconductor, which benefited from policy and economic shifts toward clean energy and resource efficiency.

Robinson observes that increased demand for services makes recycling businesses such as Horsehead Holding Corporation "the most interesting area to us right now." The company, a leading provider of zinc in the U.S., extracts the metal from steel industry byproducts and sells it to manufacturers who use it to produce galvanized steel.

Another diversified environmental fund doing well this year, New Alternatives, has been around since 1982. Managed by the father and son team of Maurice and David Schoenwald, this world stock fund invests in a range of industries that are involved with maintaining a sustainable environment, including wind generation, natural gas production and water utilities. But it occasionally looks beyond the obvious by investing in companies such as Panasonic, which makes batteries for hybrid cars, and insulation company Owens-Corning.  The fund has a social component and screens out companies with bad records for discriminatory labor practices, employment of children and animal testing practices. Weapons manufacturers, tobacco and gambling companies are also excluded.

Portfolio 21 has one of the more encompassing-and some might say looser-definitions of green. Unlike its competitors, the mutual fund has little presence in companies involved directly in environmental activities. Instead, it widens the net by screening for companies in a broad range of industries with the strongest environmental track records.

A look at the portfolio underscores management's contention that companies need not have an explicit environmental mission to be environmentally responsible. Top holding Google is committed to managing energy use and carbon emissions, and has equipped its headquarters office with solar panels and offers organic foods in its cafeteria. British Land, a property management and development company in the U.K., considers transportation, environmental issues, energy efficiency and materials selection in its new developments. Sweden's Electrolux gets the nod for making some of the world's most energy efficient appliances.

Core Holdings, Special Situations
Differences in the composition and performance of green investments make some of them more suitable as diversified core holdings, and others a better bet as environmentally friendly but more aggressive special situation investments, says George Gay, chief executive officer at First Affirmative in Colorado Springs, Colo.  Gay, whose firm specializes in socially responsible investing, considers Portfolio 21 a good core holding and one of the better performers in the world stock group. He also likes New Alternatives as a core world stock position, although he uses it less frequently because it is not on Schwab's OneSource platform.
Winslow Green Growth fits the bill as a core position for small caps.

Gay uses the PowerShares WilderHill Clean Energy ETF for clients with some tolerance for risk, but keeps such volatile sector ETFs and funds to no more than 5% to 10% of assets. Client reaction to last year's debacle among alternative energy plays was mild compared to what it could have been had he not warned them about the risk/reward characteristics of the newer, smaller companies such ETFs invest in. "Some people got nervous and pulled out when the market fell," he says. "But the reaction was far less severe than you'd expect."