Green investment not so black and white

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With an increasing number of savers being enticed by eco-investments, financial writer Laura Cohn finds that green funds are not for the faint of heart

So you separate your recyclables, take public transport to work, and check the energy rating on the new household appliances you purchase. But like many other environmentally-conscious city-dwellers, you are thinking of putting a lot more money where your mouth is by investing in one of the growing number of “green” mutual funds being marketed to the ecologically-minded with disposable income.

You’re certainly not alone. According to Lipper, a leading rater of mutual funds, savers have nearly €6.6 billion currently invested in such green funds – more than twice the amount just five years ago.

“GREEN INDUSTRIES MAY BE AMONG THE LAST TO RETURN TO GROWTH”

MIXED RECORD
On the surface, there are compelling reasons for the rush to these funds, some of which are run by the world’s biggest money managers, like New York-based giant Black Rock, which manages $3.7 trillion, and DWS Investments, an asset management group owned by Deutsche Bank. With oil prices sky-high, and post-tsunami Japan making the world jittery about nuclear power, it would seem only logical that a shift to renewable energy sources is finally at hand. So green investing will not only burnish your environmental credentials, but should provide quick and heady returns, right?

Not so fast. The reality is, these mutual funds have had a mixed track record. Since the growth of alternative energy is largely supported by government subsidies – and not the enthusiasm of concerned consumers – green industries may be among the last to return to growth once the global economy emerges from its funk.

VOLATILE
The austerity push in Europe has already led officials to cut government incentives for wind and solar power, crimping the ability of eco-friendly companies to invest in new technologies. Spain, for instance, recently slashed its solar-power subsidies to shore up its budget. On the other side of the ocean, a plan in the US that would have required utilities to generate a small portion of their power from renewable sources has been blocked by Congress.

The reliance on government support has also made green funds incredibly volatile. According to Lipper, Europe’s 15 largest funds focusing on renewable energy took a bath as the markets tanked in 2008, falling by as much as 63%. Even though they recovered in the ensuing years, most of the funds have spent 2011 back in the red. “Green funds aren’t for the faint of heart,” says Steven T. Goldberg, a partner in Tweddell Goldberg Investment Management, an investment adviser. “It’s a very long-term investment—something to hold for at least 10 years.”

CALCULATED RISK
If you’re willing to wait that long, take a calculated approach. Devote only a small part of your spare cash to the strategy, perhaps just 3%. Pick a fund that holds a wide swath of stocks – some invest not only in renewable energy producers, but multinationals that are environmentally conscious – to diversify your risk. And above all, understand what you’re buying. “The ‘green’ label can mean several different things,” warns Kathryn Young, an analyst at the mutual fund rater Morningstar. Some of the funds can have a green label, but their list of investments can include companies that are eco-questionable.

In other words, if you’re looking for a solid investment return, it may be worth looking elsewhere. And if you’re looking to be more green, you might just want to a buy a Prius instead.