Green Funds Rebound But Face Turbulence
Author: Daniel Bases and Timothy Gardner
Investors have pumped new cash into green funds, betting that fresh doubts over oil and nuclear power will energize companies marketing solar, wind and other fuel solutions.
Given the events of the past few months, the interest in alternatives is certainly growing. But the new spotlight on alternative fuels comes as the sector faces its own concerns, such as increased competition and a need to invest in growth, both of which will erode near-term profits.
Investors overlooked that concern as President Barack Obama made clean energy a highlight of his State of the Union Speech. Japan's nuclear catastrophe sent still more energy-conscious investors scrambling for funds that shun nuclear power.
Throwing further fuel on the case for alternatives are a series of Middle East political eruptions, including a violent one in oil-producing Libya, and the fact that oil prices have soared to their highest since 2008.
As a result, enough new cash was invested in these funds to overcome January's net outflow, producing the first positive quarter since mid-2009, according to Thomson Reuters' mutual fund tracking service Lipper.
Portfolio managers, though, are trying to manage investors' expectations as they also manage the cash coming into the funds. They see the sector in a high-spending mode and reliant on government subsidies.
"The (earnings) trend will be up, but it is not going to be a straight line and there are lots of bumps along the way," said Jack Robinson, founder, chief investment officer and manager of the Winslow Management Co.'s $241 million Green Growth Fund. The fund rose 9.54 percent in the first quarter but is down 20.26 percent over the past five years.
Indeed, fund managers need to tread cautiously. Some of the companies are expanding business at a double-digit pace while others are on life support.
Among funds that are not using this careful process of selection, the results are not so great. The PowerShares WilderHill Clean Energy portfolio, the largest exchange traded fund tracked in Lipper's "green" investments database, shows total returns grew 3.24 percent in the first quarter of 2011 versus 5.9 percent for the Standard & Poor's 500. The ETF has roughly $562 million in assets under management (AUM).
Over the last 14 days, analysts have revised the aggregate earnings for the nearly five dozen companies within this ETF down 12.3 percent for the second quarter, according to Thomson Reuters data.
THE SOLAR INDICATOR
First Solar Inc, the bellwether solar panel maker, has seen its earnings estimates drop 3.0 percent over this period, with the StarMine SmartEstimate predicting with a high level of conviction that earnings will come in at $1.15 per share, below a consensus estimate of $1.168.
"First Solar is a company that has been growing at well over 20 percent for a period of time. It is coming off very high growth numbers to perhaps more reasonable ones," said Robinson. "The question is, is that already factored into the price of the stock?"
First solar traded down 4.7 percent at $137.94 on Thursday.
After price gains at the start of the year, and a rise in share values, bargains may be hard to find.
"The companies are less undervalued than they were at the beginning of the year... but I don't think any of them are overvalued," said David Schoenwald, manager of the $260 million New Alternatives Fund.
Still, his fund has had net redemptions of about 5 percent through the first week of April. In 2010, the fund fell 7.26 percent, but that was better than much of the sector last year. The fund rose 14.99 percent in the first quarter of this year.
POLITICS AND SUBSIDIES
Schoenwald is also concerned about a political wind blowing against increases in government spending, a critical component for the industry's development.
Obama's pitch for alternative power boosted sentiment in the sector. Since the first week of February, net inflows totaled $152 million for the 37 funds investing in companies screened and selected for their positive environmental impact by Lipper.
That compares with $262 million in net outflows they experienced from the fourth quarter of 2009 through the first quarter of this year.
"Part of this (inflow) is psychological," said Schoenwald, referring to the Japan crisis and the hopes for alternatives to fossil fuels.
"The negative is the political situation here and the austerity in Europe. (European) political leaders cannot rush fast enough to reduce subsidies for solar and say they cannot afford it," he said.
Republicans, who now control the House of Representatives, oppose mandates that would force power companies to generate a minimum amount of energy from renewable sources.
With the political stalemate taking hold, the concerns of the past year may emerge once again.
Alex Klein, research director at IHS Emerging Energy Research in Cambridge, Massachusetts, called it "a difficult year for the renewables sector faced with the combined challenges of falling power demand, falling natural gas prices and the collapse of the carbon policy agreement."
U.S.-based private companies already face stiff foreign competition, a notable example being China's big push to be the low-cost leader in producing solar panels.
The long-term argument in favor of alternatives winning more of the market is clear. Klein says conventional energy sources continues to move upward. The cost of renewable sources has "come down pretty dramatically in response to the market conditions."
He gives the example of wind power where the prices are now in the $40-$60 range per megawatt hour versus $60-$80 in 2008.
"Primarily the growth will be driven by wind and solar. Wind has accounted for a large majority of investment and will continue for the next decade," he said.
(Editing by Richard Satran and Bernadette Baum)