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Like virtually every investment tied to the stock market, so-called green mutual funds saw red in 2008. For many investors, simple economic survival this year will eclipse all urges to save the Earth. Still, in 2009, there is some hope that things will improve for conservation-minded investors.
First, a word of caution: Not all green funds are alike. Investment advisers such as Morningstar, the Chicago firm that tracks the mutual fund industry, suggest that investors research a portfolio manager’s philosophy and track record before joining a green fund.
The first hurdle is the portfolio manager’s definition of just what constitutes a green company. Then you’ll need to decide whether that matches your personal viewpoint. Some mutual fund managers opt for a less restrictive interpretation.
They hold companies that they find to be the most environmentally conscious in their respective industries. Morningstar analyst Michael Herbst has seen companies such as Procter & Gamble or 3M show up in green portfolios. Some managers choose companies that have no negative environmental impact. Others focus on companies in green industries including alternative energy or pollution control and reduction. The Website Social Funds offers a host of links to mutual funds, green energy sources, and articles for download that can help.
Of course, it’s just as important to review fund manager returns. Like just about everything in 2008, green funds had a rough go, with many down 30% or more by December. That drop was essentially in line with the S&P 500. “The alternative energy industry does better when oil prices are going up and when their products look to be an economically viable substitute,” says Lipper research analyst Jeff Tjornehoj. Also, many companies in the green space are small and comparatively young. In many cases, “we’re talking about companies that aren’t yet profitable,” says Morningstar analyst David Kathman. “That means they have to rely on capital markets to raise money, or they have to borrow money. That just hasn’t been possible during the credit crunch.” Working in favor of green companies, however, President Barack Obama says he intends to aid alternative energy projects during his term in office.
Kathman recommends that investors seek out a fund manager with enough experience to navigate the economy’s whirlpools this year. In tough times, it’s also important to check fund expense ratios. High fees and expenses, Kathman says, are a drag on fund returns–especially in a bear market. According to Morningstar, green funds have levied fees between 1.25% and a lofty 1.98% a year on fund holders.
One rule of thumb with green funds: The more narrowly focused mutual funds work best as a small component of what should be your diversified portfolio. The management team at New Alternatives (NALFX), according to Morningstar, is one of the most experienced in the green group–managers David and Maurice Schoenwald have been sifting through the environmental sector since 1982. The fund’s expenses are quite low–0.95%–and its long-term track record with a 10-year average annual return of 3.4% (as of Dec. 1) was impressive despite a dismal 2008. The New Alternatives fund was down 50.4% for the year as of Nov. 30, a figure that was 5.7 percentage points below Morningstar’s average for its peer group of international stock funds.
Although Winslow Green Solutions (WGSLX) is a newcomer that formed in late 2007, its managers Matthew Patsky and Jackson Robinson have two decades of experience in green investing. The fund also had a rocky 2008. The Winslow fund’s expense ratio is higher, too, at 1.45%.
Finally, Morningstar analyst Michael Herbst says two more diversified holdings, Portfolio 21 (PORTX) and Alger Green A (SPEGX), invest in companies around the world that pass fund managers’ environmental and social criteria. Both are broad-based enough to work as core holdings.
This story originally appeard in the February 2009 issue of Black Enterprise magazine.