Alex Seagle's Contrary Investor: Hopenhagen
Comment of the Day

January 15 2010

Commentary by David Fuller

Alex Seagle's Contrary Investor: Hopenhagen

This interesting and varied issue of CI is published by Fraser Management Associates. It is posted in the Subscriber's Area but here is a section on green issues
Last month representatives from nearly 200 countries gathered in Copenhagen, Denmark for the Summit on Climate Change. At about the same time, a study conducted jointly by the Social Investment Forum and Pensions and Investments magazine reported that 88 percent of U.S. investment consultants believe that their clients' interest in environmental and socially conscious investing will rise significantly over the next three years. Green investing is hot (pun intended), at least in the eyes of policymakers and the media.

But how do investors feel about putting real dollars into green opportunities? When all is said and done, Economics 101 teaches that prices rise when there are more buyers than sellers (with the understanding that for every trade, there is a willing seller for every buyer). The data suggests that despite the focus on green energy and other initiatives being touted by everyone from the Copenhagen representatives
to the Obama administration, money is simply not flowing into green strategies.
Socially responsible investing (so-called "SRI funds") has been around for many years, but a slew of new offerings focused on green investing have come to market since 2007. While the returns these funds and ETFs have delivered have, in most instances, bested the broader market indices, investor interest as measured by net investment inflows has been at best tepid.

Take, for example, one of the larger and older mutual funds in the category - the $100 million Sentinel Sustainable Growth Opportunity Fund (WAEGX), started in 1994. Through the first 11 months of 2009, the fund outperformed the S&P 500 by about 600 basis points, but experienced more than $10 million in net outflows. And this is during a time of unprecedented interest in green issues and the associated investment opportunities.

The two most often-cited reasons for the lacklustre demand on the part of investors are geopolitical risks and long development lead times for the new technologies required. Spain was a leader in solar energy, due in large part to incentives and subsidies targeting the technology. But in 2008, the government in Madrid cut subsidies by about 35 percent, crushing solar company stocks around the globe. At the same time, Japan was considering bringing back incentives to boost solar energy use. Similar rounds of political ping pong in Germany and the U.S., among other nations, keep investors guessing. Add to this regulatory uncertainty the likelihood that new technologies in alternate energy routinely take 10 years or more to fully develop, and investors will often look for other places to put their money.

None of the foregoing discussion is meant to dissuade an investor from studying - and perhaps ultimately investing in - alternate energy and other green opportunities. The Contrary Investor believes that the real money is made at the beginning and the end of misunderstood or under-appreciated trends. Anyone can participate in the middle of a trend when it is well-established and in vogue as the subject of cocktail party conversation.

In the current state of green investing, politics is clearly colliding head-on with business fundamentals, creating an uncertain backdrop - never a good thing in the short run for stocks. But many of the solar and wind-energy-focused funds and ETFs, while up over 20 percent this year, are still off roughly 50 percent from their launch prices of 2008. For now, the popularity of green investments seems to come and go in fits and spurts, and there seems to be no indication of significant inflows of capital. It is clear, however, that phrases like "going green" and "sustainable practices" have moved from the fringes to the forefront. The Contrary Investor believes that companies that have a solid track record of reducing the environmental impact of their operations, as well as companies that offer alternative energy technologies such as solar and wind power will be excellent investments. It is not a question of "if", but "when", and removing one of these key uncertainties increases the chances for success. You pays your money, and you takes your chances!

David Fuller's view I agree with this and will summarise by saying that investment is a fashion industry. It pays to be in the fashionable trend leaders while they continue to perform. However this is inevitably a moveable feast, with timing determined by crowd psychology. Therefore it is never a bad idea to be thinking about investments which may be overlooked today but have the potential to attract the crowd's eye tomorrow.

Energy is a Fullermoney theme, although I personally have not participated in the sector during this latest bull cycle to date, other than to open the very occasional long trade in crude oil. However, Eoin has continued to review various energy sectors, not least natural gas shares which have been fashionable since gas from shale deposits became highly commercial due to technological innovation.

I believe this has overshadowed green energy, in terms of renewables, which are still fledgling industries dependent on subsidies, which are less forthcoming when energy prices are not particularly high. Also, new industries are speculative because we know less about them and therefore are additionally challenged in attempting to pick winners rather than losers.

Being of indolent nature, I would struggle to understand the individual companies beyond a superficial level. However I can at least monitor them on price charts and better yet, monitor some of the funds for sector timing. Currently, they are sleepers, as you can see from BlackRock New Energy Investment Trust (BRNE LN), which I once held briefly before its current reincarnation, and Guinness Atkinson Alternative Energy Fund (GAAEX LN). The Library also contains green energy funds and ETFs listed in other countries.

These have underperformed for reasons touched on above and they could easily retrace some of the recent gains as the price of crude oil eases within its ranging uptrend now that the winter cold snap has at least temporarily abated. For now, I remain content to monitor green energy funds but they too will eventually have their day in the sun. Another dip within the base formations would present a buying opportunity for patient investors. Alternatively, one could wait until the trending commences and pay up on clear evidence of dynamic upside breakouts.

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