Green Mutual Funds provide value to communities

The Value In Socially Responsible Investing

Marc L. Ross, Investopedia

Once considered a niche area of investment practice, socially responsible investment (SRI) now embraces a wide investment audience that includes individuals, high net worth and otherwise, and institutions such as pension plans, endowments and foundations. Religious tenets, political beliefs, specific events and the broad remit of corporate responsibility (i.e. green investing, social welfare) all drive this investment practice.

Indeed, the professional association USSIF: The Forum for Sustainable and Responsible Investment, estimates in its "2010 Report on Socially Responsible Investing Trends" that around $3 trillion in assets under management subscribe to one or more of the aforementioned approaches to socially responsible investing.


$316 billion in socially responsible mutual funds alone

Over 250 mutual funds in the United States alone, utilize a social screening process, with assets of approximately $316 billion. There are hedge and exchange-traded funds (ETFs) that adopt a socially conscious approach to investment, as well.

Socially responsible investing expresses the investor's value judgment of which several approaches may be used. One example is when an investor avoids companies or industries that offer products or services the investor perceives to be harmful. The tobacco, alcohol and defense industries are commonly avoided by people who try to be socially responsible investors.

In the 1980s, divestment of American companies doing business with South Africa was highly publicized. Another is a performance ranking in terms of how well a company achieves on not only financial metrics, but also on social, environmental, governance and ethical issues.

Yet another involves active engagement between the company's shareholders and its management. Finally, there is the activist tack that involves the investor advocating specific issues. Any one or a combination of these approaches is a critical driver in the process of portfolio management and fiduciary oversight.

Moreover, the practice is global, with different approaches emphasized in various countries as a function of their culture, government, business environment and their interrelationship. What obtains as socially responsible or not has led to differing opinions on whether these approaches yield competitive returns.


For Whose Benefit?

Socially conscious investors may assume a more holistic view of a company when making investment decisions, looking at how it serves its stakeholders, a rubric under which are subsumed not only shareholders, but also creditors, management, employees, the community, customers and suppliers. Within this context, socially responsible investment seeks to maximize welfare while earning a return on one's investment that is consistent with the investor's goals.

On the surface, these two notions may appear contradictory. For example, there may be an implicit cost of such an approach to the extent that it eschews profitable companies and sectors. Tobacco, alcohol, firearms and gambling have been lucrative industries.

However, to a socially conscious investor, their inclusion in a portfolio would fail to serve the investor's objectives of living in a world void of conflict and legal stimulants and depressants. As with any investment approach, the socially conscious investor needs to:

- Define his, her or its risk and return objectives and constraints.

- As to the latter, the investor needs to determine what its socially conscious constraints are. These may differ considerably, depending upon the investor. Muslims who wish to be compliant with Shari'a law would exclude any companies connected with the production, sale and distribution of alcohol, any financial institution that lends and any business that profits from gambling. Investors opposed to armed conflict as a means of dispute resolution may avoid any company or industry associated with defense, national security or firearms.

- Once the investor defines its constraints, it must decide upon an approach to implement them, be it the use of inclusionary or exclusionary screens, best practices criteria or advocacy. The type of investor may determine the most suitable approach. For example, advocacy and dialog with a company or industry would be better suited to a large public pension fund.

Consider the work of CalPERS or the Swiss billionaire activist Martin Ebner, the latter more an example of individual shareholder activism. By contrast, an individual investor working with an advisor would find the screening process more feasible.

- Social investing has implicit costs - the returns potentially foregone through the exclusion of companies with unacceptable products or business practices - and explicit costs.

For those considering an active approach, fees for exchange-traded and mutual funds tend to be a bit higher. For investors seeking a passive management, there are fewer indices to replicate and the funds that do typically bear higher costs.

- Diversification is always an important consideration. Screens may hamper this process, unintentionally or otherwise.
Utilizing this type of traditional investment framework would appear to make the process manageable, so long as the investor weighs the costs and benefits of this type of investment approach carefully.

However, there could appear to be a dilemma upon whose horns the investor invariably would be impaled. For example, if investment in such "vice" products as alcohol and tobacco is anathema to a socially conscious investor, what about the transport and energy industries?

After all, the products have to be shipped to the point of sale which requires various means of transport which, in turn, require fuel. These types of considerations make the precise definition of one's socially responsible investment goals all the more crucial. The practice is often a gray area.

Depending upon the perspective of the individual, companies may display characteristics that are both irresponsible and responsible.

The Bottom Line
Socially responsible investment reflects an investor's values. While the opportunities in this realm of investment management have grown considerably, one may not ignore best practices of investing.

The investor must clearly define their goals when undertaking this sort of approach, recognizing its potential trade-offs and clearly articulating a policy that considers all the variables when looking to maximize the good over the plentiful and abundant.

Risk management and attention to costs are essential. Research seems to indicate that results from socially conscious investing are not statistically significant from a more conventional approach.

Investing in Green Mutual Funds and ETFs

Buying cleantech investment funds safer than individual stocks

by Gavin Adamson, TheGlobeandMail.com

As with hybrid autos and organic food, consumer demand is driving the growth of green investment choices, and new options come available every week.

“People are asking about green and socially responsible investments, and certainly more institutions and pension funds are paying more attention to the area,” says Adrian Mastracci, president of KCM Wealth Management in Vancouver. But for many investors, putting money into specific stocks of fledgling green companies can feel too risky, says Mr. Mastracci. To diversify, investors can turn to a handful of mutual funds and exchange trade funds (ETFs) that provide broad environmental criteria among their investment screens, along with “pure-play” green portfolios that hone in on specific industries in solar, wind and other alternative energy industries.

Passively invested ETFs automatically put money into a basket of funds defined by an index. The companies that market these ETFs charge management fees at a fraction of the cost of the mutual funds, whose stocks are selected by professional money managers. The management expenses are subtracted from the return of the investment.

“ETFs are just cheaper,” says Larry Berman, chief investment officer at ETF Capital Management, who owns a couple of green-focused ETFs in his portfolio. “They give you the index and you don’t have to worry about volatility in individual stocks.”

The tradeoff is that an actively managed mutual fund may outperform the markets or reduce volatility in a portfolio in the long run, whereas an ETF will track only an index. And Mr. Berman notes that green ETFs tend to be a little more expensive than those that mimic broader indexes because they are more expensive to run.

Generally, more focused investments should make up a smaller part of your portfolio, says Dan Hallett, president of his Windsor-based research firm, Dan Hallett & Associates, Inc. “The more narrowly you zoom in on the market, the more volatility you are likely to experience,” he notes, but if you’re prepared for long-term investing, volatility isn’t inherently bad.


SOLAR ENERGY

ETFs focusing on solar power are especially hot. In April, New York-based asset manager VanEck Global Investors, which sells several green ETFs, launched the Market Vectors Ardour-Solar Energy ETF, with a management expense ratio (MER) capped at 1.09 per cent. It follows the Ardour Solar Energy Index, tracking companies that earn at least two thirds of their revenue from solar technology products. The companies must also have a market capitalization of at least $100-million, a limit that will include many small cap names.

The index favours bigger companies. Its largest constituent is Renewable Energy Corp. AS, a Norwegian company involved in the production of the wafers used in photovoltaic technology, most commonly in solar panels. First Solar Inc., a small-cap U.S. company that builds solar energy products, is weighted at more than 10 per cent in the ETF as well. The ETF holds a total of 34 names it trades on the American Stock Exchange (AMEX) with the memorable ticket, KWT.

VanEck’s ETF competes with the Claymore/MAC Global Solar Energy ETF, which tracks 25 international companies. Its mandate allows for companies that are less focused on the solar industry, however, but the top two holdings are the same. It’s MER is 0.65 per cent.



WIND POWER

Similarly, an ETF with the ticker FAN trades on the New York Stock Exchange. The First Trust ISE Global Wind Energy ETF invests purely in international wind-energy related technology companies. Vestas Wind Systems AS, a large-cap Danish wind turbine company takes a top spot in the portfolio of 52 publicly traded businesses with market capitalization of at least $100 million. Larger companies take a greater position in the portfolio.



CLEAN TECH AND ENERGY

In the United States, iShares offers the S&P Global Clean Energy Index ETF, based on a basket of international clean-energy related businesses tracked by Standard & Poors. The index of 30 stocks favours those with greater exposure to clean energy, which can include solar, wind, thermal and others. Again, Vestas Wind Systems is among the top holdings, along with First Solar, noted above. The ETF trades on the AMEX, and operates with an MER of less than 0.5 per cent.

The PowerShares Cleantech Portfolio, trading on the AMEX, casts a wider net. It invests in an index of 75 companies with market capitalization of between US$200 million and $1 billion. The businesses must report at least 50 per cent of revenues in clean energy technology. Siemens AG., the German industrial company that includes electrical energy generation as a business line, is the top holding. The fund reports an MER of 1.32 per cent.

Trading on the Nasdaq exchange is the First Trust NASDAQ Clean Edge U.S. Liquid Series Index ETF, with an MER capped at 0.6 per cent. It tracks the same industries, but narrows its investments to the United States.

Mr. Berman says he’s bullish on all these sectors, but they do have their risks. He says the investment theme isn’t new, and some of the stocks are already trading at relatively higher price to earnings multiples compared to the rest of the market.



GREEN MUTUAL FUNDS

Last month the HSBC Global Climate Change Fund entered a small field of mutual funds in the Canadian market that mix some of the riskier technology companies described above with well-known large-cap companies. The fund’s top 10 holdings include E.ON AG, the gas and electrical utility, and among the largest German companies.

Acuity Clean Environment Fund is similarly diversified, investing in the Canadian microcap solar-power tech company, 5N Plus Inc., along with a large-cap oil and gas miner and distributor SunCor Energy Inc.

Toronto-based investment company Criterion Investments sells two global mutual funds, the Criterion Global Clean Energy Fund and the Criterion Water Infrastructure Fund, which invests in a broader theme of water infrastructure, filtration and distribution. For example, the French consumer products company, Nestle SA is a major holding in the water portfolio owing to its bottled water sales. Each is managed by Swiss-based Pictet Asset Management.

“These large funds can go out and buy these multinational companies, most of which are relatively clean tech,” says Duncan Stewart, a portfolio manager who runs Duncan Stewart Asset Management Inc. in Toronto.

The funds are available for a minimum investment of $500, with MERs that range from 2.0 per cent and upwards if you buy them from advisers, who may charge one-time sales commissions as well.

PowerShares Cleantech Portfolio ETF (NYSE: PZD) #1 in 2010

PZD beats 35 other green energy and clean technology funds




According to Bloomberg New Energy Finance research, PowerShares Cleantech Portfolio ETF (NYSE: PZD) finished first of 36 public equity funds focused on clean energy and/or clean technology.

Of the 36 mutual and exchange traded funds worldwide that Bloomberg NEF tracked, the average fund fell 6.6% in 2010. In contrast, PZD, which tracks The Cleantech Index TM (AMEX: CTIUS) rose 7.5% in 2010 and rose 11.6% in Q1 2011.

Rafael Coven, Cleantech Indices' Managing Director and Index Advisor noted that the poor performance of most renewable energy stocks in 2011 was a major reason why Cleantech Index-based funds significantly outperformed their peers. "Since the Cleantech Index is diversified across many industries, it had less exposure to the volatile renewable energy sector. In addition, the Index includes only the best companies in each sector which tend to fare better than their sectors as a whole. I expect this strategy will result in continued long-term outperformance of peer funds and indices, but I certainly don't expect that CTIUS-linked funds will finish first in a given year. That's short-term stuff. We track a long-term trend.”

Added Cleantech Group's Managing Director for Europe & Asia, Richard Youngman, "The Index doesn't track an industry or a region, but rather a global megatrend that cuts across a wide range of industries and geographies. Narrow industry sectors will rise and fall dramatically, but we believe the growth in demand for clean technology will continue to accelerate across many industries for decades. The Index's four-year performance relative to the S&P underlines that.”

Other funds tracking the Cleantech Index had similar performance: they include the recently listed PowerShares Cleantech ETF in Mexico (ticker: PZD.MX) and the KSM Cleantech Index ETF (Bloomberg ticker: KSMCLNT) in Israel.

As part of its quarterly rebalancing, the Cleantech Index has added Switzerland's SGS S.A. (SGSN.VX) and Mistras Group (MG: NYSE) effective March 31, 2011.

Full online article on Investor Ideas about PowerShares CleanTech Portfolio

PowerShares Cleantech Portfolio, official website