'Green' funds, in the red, buy 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 per-formers," 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, 2010. 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, 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 US 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," Mr. 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," Mr. Berridge says. "But it's not really their fault." In his view, investors are responding rationally to market and regulatory forces.

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