Investing in Vermont: Profits await clean energy investors

Peter Lynch led the Fidelity Magellan fund to big gains by following an incredibly simple principle -- "Invest in what you know." For environmentally conscious Vermonters looking to make investments in line with their values, clean energy is a ripe opportunity that should yield healthy returns in the years to come.
Vermonters are taking the lead in this growing sector.

In my own corner of Chittenden County, the signs of clean energy are abundant. Hinesburg is home to NRG Systems, a global leader in wind energy, and South Farm Homes, a new development of eco-friendly homes. And in Huntington, Maple Wind Farm has embraced wind power as a source of energy. People across our state are seeking ways to reduce their dependency on oil, gas and electricity supplied by the grid, for environmental and economic reasons.

When the price of crude oil goes up, so does the cost of gas for our cars and homes, an unwanted expense. One benefit to higher prices of oil -- people start to conserve and seek alternative forms of energy. The Obama Administration is also backing clean energy, with a goal to double U.S. renewable energy in three years, a move that should benefit the sector.

Deals are out there

The recent 50 percent drop in the stock market has affected nearly every investment, including clean energy stocks, which fell 65 percent, according to the Wilderhill Clean Energy Index. Potential investors in the sector shouldn't let those losses dissuade them from investing today -- the recent decline presents attractively priced opportunities. The most basic investment principle is "buy low, sell high" -- meaning that buying when stocks are down is a plus.

Clean energy is the Wild West of investing, still in the early innings that will be marked by big successes and frequent failures of individual stocks. The rewards for early investors in this growth sector may be significant, but investors should take a cautious approach by allocating only a small portion (5-10 percent based on one's risk tolerance) of an investment portfolio to clean energy.

The risk of buying individual clean energy stocks is great, and most investors would be better advised to stick with a mutual fund or exchange-traded fund (ETF) that can provide diversification. These investments represent a pool of individual stocks, thereby reducing the risk of owning a single company that could go belly up.

Winslow Green Grow

Vermont is home to many clean energy and environmentally responsible companies. The Winslow Green Grow (WGGFX) invests only in green stocks, buying companies that provide environmental solutions and those that are environmentally responsible. The fund is highly concentrated with only 40 to 50 stocks in the portfolio, and favors smaller growth stocks. One of the fund's top holdings happens to be Waterbury's Green Mountain Coffee Roasters.

From 2001 through 2007, before the stock market crash, the fund returned an average of 19 percent a year, before collapsing 61 percent in 2008. The performance demonstrates that this high-risk fund is not for the faint of heart, but is capable of consistent outsized gains. (Winslow Green Growth: No-load, $2,500 minimum, and 0.9 percent expenses).

New Alternatives

Now more than ever, in this age of renewed interest in alternative energy and a volatile stock market, investors should be putting their hard-earned investment dollars with seasoned managers. New Alternatives (NALFX) mutual fund is managed by a father-and-son team, Maurice and David Schoenwald, who have been actively investing in the sector since 1982. With the experience of bull and bear markets, as well as an ever-changing landscape for clean energy, the team is well positioned to navigate a choppy market.

New Alternatives' performance during the good times was outstanding, racking up gains of 33 percent in 2006 and 2007, handily beating the competition. In 2008, the fund got crushed, falling 47 percent, before rebounding this year with gains of 16 percent in the first half of the year. (New Alternatives: 4.75 percent load, $2,500 minimum, and 1.09 percent expenses).

iShares S&P Global Clean Energy Index

The iShares S&P Global Clean Energy Index (Nasdaq: ICLN) is an ETF with global exposure to alternative energy, owning 30 of the largest clean energy stocks in the world. The fund is designed to be a barometer for the clean energy sector, and the international investments should further cushion risk.

Expenses can have a huge impact on the total return of an investment, so trading and management fees are an important consideration. ETFs are a low-cost option to mutual funds, providing similar diversification and comparable returns at a reduced cost. And the iShares expense ratio at 0.48 percent is the lowest among clean energy ETFs. The fund trades just like stock, with no investment minimums or upfront fees other than the cost of the trade.

These clean energy investing options might not be available through a company-sponsored 401(k) or 401(c)(3) retirement plan. But any brokerage firm, including online brokers such as eTrade or TD Ameritrade, will be able to purchase these funds.
Clean energy investments remain in the early stages. While exposure to this opportunity is important for growth-oriented investors, clean energy should remain a small portion of an overall investment strategy, and not a core position.

Ian Wyatt is the founder of Business Financial Publishing and author of the upcoming book, "The Small Cap Investor: Secrets to Winning Big with Small Cap Stocks." Read his blog at www.IanWyatt.com and follow him on Twitter at @IanWyatt

This column originally appeared in the Business Monday section of the Burlington Free Press on August 3, 2009.

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