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'Green' funds, in the red, now buying not-so-green stocks

It's been a long, cold stretch for mutual funds driven to make money by fighting global warming. The chill has forced a dilemma for the funds: Should they stick with the same high-minded strategy, or warm to a new approach?

Investors have reason to complain. Funds focused on renewable energy have been in the cellar, posting three-year returns in the bottom fifth percentile of their respective categories, according to fund tracker Morningstar. Those with the greatest exposure to wind and solar stocks have had the poorest returns of all.

"They've been among the worst performers," says David Kathman, a Morningstar analyst who covers socially responsible mutual funds.

Under pressure to do better, some "climate funds" have been revamping their portfolios. Consider the DWS Climate Change Fund, based in Kansas City, Mo., which lost 10.7 percent over the three years ending Dec. 31. Disheartened investors pulled out $34 million over the past year, leaving the fund with just $39 million in assets as of Jan. 31.

DWS has responded. Gone from its Top 10 holdings are the three solar and wind stocks that made up 12.5 percent of the portfolio in July. It has less exposure to renewables, is more diversified and has added industrial conglomerates, such as Siemens and General Electric. DWS did not respond to requests for comment.

Other funds have followed similar paths. One year ago, F&C Global Climate Opportunities Fund had 9 percent of its holdings in wind and solar stocks. Now, the London-based fund has just 1 percent in solar and zero in wind. Most of the fund's alternative-energy investments are in natural gas, which critics argue is no "alternative" because it's a fossil fuel whose emissions exacerbate global warming.

Fund manager Richard Mercado defends these shifts on the grounds that new avenues offer better returns, yet still conform to the fund's investing parameters. (The fund is not open to U.S. investors.)

"It's difficult to [imagine] governments funding subsidies for wind and solar when they have high unemployment and are really reluctant to increase electricity prices," Mercado says. "But gas is a nice little area within alternative energy. It's currently cheap; it's a cleaner source of fuel; and it's sort of a stopgap, transitional area for energy."

Others worry that in a bid to shed volatility, some climate-related funds might be cozying up to climate culprits and pulling support from companies that are on the front lines of fighting climate change. Agribusinesses don't belong in a climate fund in part because fertilizer manufacturing and farm equipment compound emissions problems, according to Rob Berridge, senior manager of investor programs at Ceres, a Boston-based advocacy group for sustainable business practices. (DWS owns a miner of potash, a key fertilizer ingredient, as its second-largest holding. F&C owns farm-equipment manufacturers Deere and AGCO in its Top 5.)

What's more, when investors shift millions from wind and solar to natural gas, "it slows the speed with which we'll get to the really true climate solutions," Berridge says. "But it's not really their fault." In his view, investors are responding rationally to market and regulatory forces.

Climate funds emerged in the mid- to late-2000s with a classic socially responsible strategy: address a big systemic problem by investing in problem solvers. Investors eager to cut carbon emissions embraced new funds, such as the Calvert Global Alternative Energy Fund, which debuted in 2007.

"This fund gives investors a vehicle to get right into the middle of wind, solar and biomass," said Calvert Senior Vice President Bennett Freeman, in a 2008 interview. "It gets our investors right into the middle of the action here at a time exactly as it's taking off."

It's been a rough ride for the Baltimore-based fund. Calvert's Global Alternative Energy Fund was down 58 percent in 2008, then bounced back with a 23 percent gain in 2009, only to fall another 20 percent in 2010. Companies in the sector have faced multiple challenges, from difficulty getting financing to competition from falling natural-gas prices.

But Calvert, which did not respond to requests for comment, is pushing ahead with the same strategy. As of Dec. 31, more than 54 percent of the fund's portfolio was in solar and wind.

Some funds appear to be as zealous as ever for the clean-energy cause. The Guinness Atkinson Alternative Energy Fund has 80 percent of its holdings in wind and solar. Down a painful 29 percent over the past three years, the London-based fund ranks dead last among energy-sector funds, according to Morningstar.

Portfolio manager Matthew Page makes no apologies, nor does he profess a lofty social mission to justify shareholder martyrdom. Instead, he's buying up Chinese solar-panel manufacturers because he believes they're undervalued.

Other funds with climate concerns are hedging their bets — and generating better returns. Since late 2009, the Winslow Green Growth Fund has been investing not only in climate-change solutions but also in adaptations. As a result, it owns fewer solar stocks now than six months ago and owns more companies that make farming more efficient in an anticipated era of drought and environmental stress.

"As we began to really appreciate that our country, and frankly the world, don't seem to have a stomach for addressing climate change through mitigation ... we began thinking more about adaptation," says Jackson Robinson, founder and portfolio manager of the Winslow Green Growth Fund. "We're going to have more violent weather, more droughts, more shortages — and we're actually seeing that — so how do you invest?"

The Winslow Green Growth Fund has an environmental mandate beyond climate-related issues; its largest sector holdings are in green building and resource efficiency areas. Clean energy made up 15 percent of the portfolio in 2007; today, it's just 10 percent. The fund earned a 7.4 percent return last year and is down 14.5 percent over three years.

Sometimes conventional energy investments help buffer the impacts of renewables in a portfolio. The New Alternatives Fund has increased its holdings in natural gas from less than 10 percent in 2005 to almost 14 percent now. Natural-gas companies are controversial since they trade in fossil fuel, says fund manager Murray Rosenblith, but he likes how they're cleaner than coal and pay a portfolio-stabilizing dividend. He adds that the fund remains committed to renewable energy. Solar, for instance, represents about 5 percent of holdings.

"The whole idea of the fund was to provide capital for the development of an infrastructure built on alternative energy," Rosenblith says. "If we don't do that with a long-term vision, then we're not fulfilling our original mandate."

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