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Portfolio > Portfolio Construction

Growing Green

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Whether as a conscious effort to “do good” or part of year-end tax planning, investors think more about charitable causes and social responsibility during the holiday season. While some finalize gifts to causes they care about, others may ask how else they can incorporate into everyday life actions that could enhance the greater good.

At first glance, an investor might think that the $191 million Winslow Green Growth Fund (WGGFX) is just another no-load, small-cap growth fund with good long-term performance. But a closer look reveals a fund that looks for “small companies with big, green ideas, that also have enviable business and financial models, with a proven management team,” says portfolio manager Jackson Robinson, who runs the fund with Matthew Patsky.

Standard & Poor’s gives the fund a four-star rank for the five-years ending October 31, three stars for the three- and one-year periods, and three-stars overall.

How much money do the two of you manage overall?

Robinson: Our assets today are about $330 million; all of the assets are managed in an environmentally responsible manner. [And in the fund there is] about $200 million.

From its inception this fund’s sole focus has been on the environmental aspects of the SRI [Socially Responsible Investing] world, and SRI is a broader way to look at investing that includes some non-environmental dynamics. The reason that our focus is primarily on the environmental aspects is because it’s very measurable: you can measure environmental costs, environmental liabilities, and environmental revenue, whereas for other tenets of SRI investing it’s more difficult to quantify either the costs or the benefits.

What’s your investment process for the fund?

Patsky: We’re primarily bottom-up stock pickers focused on looking for opportunities to identify industry leaders, new trends [in] industries. We’re trying to identify companies that have strong management, promising technologies, or a promising product that we think can take a leadership position, and look for stocks that we think can double in the next 18- to 24-months. It’s a concentrated portfolio strategy where we’re looking to buy up to a 5% position in the company, leaving us with a portfolio, normally, just because of inflows or outflows in terms of names we’re getting into or out of, of around 30 to 34 names.

When we look at the universe of potential stocks we’re sort of simplistically carving it into three different categories: green companies that are offering environmental solutions; clean companies that are looking to minimize their environmental footprints; and dirty companies. We’re certainly looking to include as many green companies as we can in our portfolio. To the extent that we can’t fill the portfolio with all green, we’re filling it out with clean, and our primary objective is to continue to deliver performance for the shareholders–so we won’t force the percentage of green companies in the portfolio to 50% in order to be able to say we’re at 50%; we’re trying to make sure we are delivering performance, and doing it with a combination of green and clean.

Would you talk about your largest holdings?

Robinson: Happily. One of the holdings that we’ve been involved in for a long time is Fuel Tech (FTEK). This is a company whose business operations are in Illinois, [and it's] headquartered in Stamford, Connecticut. They are in the business of cleaning emissions from coal and heavy oil burning, primarily utilities or industrial boilers. One part of their business relates to removing NO [nitrogen oxide] and SO [sulfur oxide], so it’s very much a regulatory-driven business and to some extent in that process you also significantly reduce mercury, which is a very big problem. The process also reduces particulate emissions.

The economic-driven side of their business is called Fuel Chem, and that is a similar technology that is spurting magnesium into the stack and the boiler to optimize the burn so that there is very little slag buildup. Slag creates a big problem in terms of quality of burn but it also builds up; at some point it gets so bad you have to shut the whole system down and use whatever techniques you have, including dynamite, to dynamite it out, and restart the boiler. Their product allows you to not only clean existing slag but almost totally eliminate it in future burns.

This is a recurring revenue business, unlike the first part of their business, which is a one-off sale. In essence they’ll install the equipment almost for free, or at cost, and they will sell you the magnesium on a regular basis, which you’ll feed in to optimize the burn. They are currently in 20-some odd utilities in the U.S. There are 1,600 prospects, and the financial payback on one of these installations is 500% a year, so the economic case is compelling. Utilities, of course, are very slow to get on board any relatively new technology, but this company now has a new CEO who has a lot of utility experience and we expect that what is currently an $80 million company could well become a billion-dollar company in the next five or seven years, and be extremely profitable.

Patsky: Another, newer holding in the green energy space is Zoltek (ZOLT), a company that has gone through a fairly dramatic transition. The company was making fiber for textiles and, realizing the value they could add using carbon fibers for another application, switched their manufacturing to carbon fiber. They are now predominantly seeing their production capacity used for the wind turbine industry. The majority of the carbon fiber capacity of Zoltek is contracted, long-term, to the wind turbine manufacturers in Europe. We’ve seen a fairly dramatic turn in margins, and a move into profitability that is pretty substantial, from a company that was losing money just a year-and-a-half ago. It’s now a core holding. The industry is growing very rapidly in terms of demand for wind energy, and they are positioned as a supplier into that whole channel so we really don’t have to figure out who is going to win on the wind turbine side; they’re ultimately all going to be using carbon fiber.


What is your sell discipline?

Patsky: We will automatically begin to trim a position if it were to actually run, and bump up against 10% of the portfolio, which in small cap can happen–we buy a 5% position and if everything goes right it could take off. We will also sell the entire position if it reaches our price target. Oftentimes the reason why the stock is running is because things are improving and the estimates are going up, and the price target is going up, so you may be just trimming it and not selling the whole position. Alternatively, things could have changed, we could have a thesis that is proven wrong, there could be a shift, environmental or governance related–we’ve had that happen; or it could be that the fundamental story is not playing out and we are going to get out. We’ve had examples where the fundamental story has been intact, the stock is doing okay, and a governance issue was raised, and we’ve had to sell it because it no longer meets our governance [criteria]. Likewise, we’ve had it happen where an environmental issue comes in because they’ve done an acquisition, and with the acquisition there is an environmental issue that we think is too much risk and we are out of it.

Do you have one that you bought under a certain thesis that didn’t work out as expected?

Robinson: We had a holding in the clean category of a company that’s in the streaming video business, VitalStream (VSTH). They were enjoying phenomenal growth because it’s a huge growth industry, but their largest customer was MySpace, [which] is owned by Rupert Murdock, and they decided to develop this technology internally. So here’s a company with the loss of a major customer–now shortly after they announced that, they announced they were going to be acquired by a larger company that was in a broader space–but because of the changing dynamics, and I’m talking fundamentals, it’s a situation where we sold; we actually made a little money.

Where would this fund fit in an individual investor’s portfolio?

Robinson: The traditional way of looking at the fund is small-cap growth, which tends to get somewhere around 10% of a normal portfolio but it’s important to understand why it’s small-cap growth. We like to tell people “It selected us, we didn’t select it.” That’s because 80% of the green companies today are small-cap growth companies. That’s down from 90% a couple of years ago. What’s happening is that some of these companies are becoming mid-cap growth companies such as Whole Foods (WFMI), for example, but other, larger companies are recognizing the opportunity as well as the need to be involved in the green space or to green their basic businesses. So the universe is growing but it’s just getting going. That’s why we are in the small-cap growth space today, but our files of opportunity are growing, and a number of the new opportunities are larger-cap names, so we are exploring having a multi-cap green fund–and then the answer to your question, [the allocation] would be 100%.

Patsky: When you look at allocation to small-cap growth it really depends on investment objectives; somebody younger, with a longer time horizon could be more like 20% in small-cap growth; somebody who is 55 and 10 years away from retirement should probably be no more than 5% small-cap growth, but it’s really dependent on the time horizon–10% seems to be the normal, average allocation to small-cap growth.


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