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

Some 'green' funds are diversifying to boost returns. Does that undercut their mission?

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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.

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"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 fund, based in Bethesda, Md. 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. [Editor's note: This paragraph was changed to correct the location of Calvert's headquarters.]

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," Mr. 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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