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The Green Advisor: A Two-Bucket Approach

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The idea of green investing to a large degree began with the socially responsible investing (SRI) movement. In its early years, SRI seemed to operate more from a moral imperative with investment performance a secondary rather than primary characteristic. Lately the emphasis among those subscribing to an SRI philosophy has been on environmental, social, and governance (ESG) factors in the investments they make. It’s under the environmental heading that green investing most closely aligns with SRI, but the two are not necessarily synonymous. Like beauty, green appears to be in the eye of the beholder and the definition depends on the speaker.

Christopher Walsh has been a V.P. and senior analyst with Fred Alger Management and the portfolio manager for the firm’s Spectra Green Fund since its focus (and name) changed significantly in October 2006. He sometimes gets a little frustrated trying to explain to people just exactly what their investment approach entails. “I try to tell people, it’s not an SRI fund at all, which kind of confuses them,” he explains. “I tell them that if Budweiser came out with a plan to reduce its waste by 50%, that would make it a green company. It’s obviously not socially responsible, but I’d buy it.”

Perhaps the distinction between SRI and “green” is especially confusing in the case of Walsh’s fund, since at its inception in December 2000 it was known as the Alger Socially Responsible Institutional Fund and it followed a somewhat different investment strategy. Since its re-launch with a green strategy, the fund has focused on investing at least 80% of its net assets in companies that conduct their business in an environmentally sustainable manner, while demonstrating promising growth potential.

“That’s what I tell investors and other people that I talk to about it,” Walsh continues. “I find I keep coming back to alternative energy, because as soon as you say green, people want to talk about solar. I get calls from people who are potential investors and that’s the only thing they want to talk about, but even when it was a big part of my fund and solar was going crazy, it was only maybe 10%. Now it’s maybe 4% or 5%.”

In One Bucket . . .

When it comes to green investing, “there is so much more that’s going on” than solar, Walsh says. “There are companies that are helping the environment in all these different ways,” he points out. “I really try to focus people on that–this is not an alternative energy fund.”

According to Walsh, he looks at the fund’s investments as going into one of two buckets. The first is the most obvious and the one that most people think of when they think green–alternative energy and products and processes that reduce the use of petroleum products or that help reduce carbon emissions.

The second bucket is composed of companies that have incorporated environmental sustainability into their business practices by, for instance, cutting down on packaging and shipping or making their buildings more energy efficient.

One of the fund’s holdings is Wal-Mart, which has taken gigantic steps toward making its stores and warehouses more energy efficient. “They are a very big [investment] for the green movement, but screen poorly for a lot of the SRIs,” points out Walsh.

Having a two-bucket investment strategy has allowed Walsh to stay invested as the market has shifted while reducing the fund’s potential losses. “When solars are down 60%, yes, we’re going to be down, but not to that magnitude,” he points out. “At the same point, if solars go up 70%, we’re not going to catch all of that, but with the two buckets there, we try to move along with where we think the market will be.

“Two years ago we were split pretty evenly,” he continues. “We had a lot of alternative energy, we had a lot of auto parts that are increasing the efficiency of miles per gallon and cutting down carbon emissions. Now it’s kind of weighted toward the other side of it because of where the market is. We let the market lead us and right now, especially in the alternative energy space, there are a lot of problems getting funding because all these projects are so capital intensive.” So that results in the fund being “heavily invested in some of the more mature companies in some of the more mature industries. That’s not to say that we don’t like the alternative energy space, it’s just obviously a difficult spot to be in right now.”

The first step in adding any company to the portfolio is for it to have a business model that passes muster with Alger’s team of analysts. “We just take our research a step further,” says Walsh. “We say, ‘Okay, we like it as a company and as an investment, but does it fit my investment criteria? Is it a green company?’”

To make that determination, Walsh relies on both internal research and outside sources, such as Innovest Strategic Value Advisors (see “It’s All About the Green,” Investment Advisor, December 2008).

And in the Other . . .

In the current environment, Walsh has been investing in mature companies in mature industries, and at the end of last year his biggest sector was information technology. “I don’t think the sector as a whole is green, but I think a lot of those companies are forward-thinking because that’s really what technology is, the forefront of change.” Therefore, he says, many IT companies “are at the forefront of what we’re looking for in the green movement,” adding that both Google and Microsoft have made significant investments in alternative energy. “Also, tech as an investment has been doing a little better over the last couple of months than many of the other categories, so it’s also a good place to be.”

As far as the alternative energy investment bucket, Walsh is still active, he’s just reduced his exposure. “On the solar side, it’s a tough business right now,” he says. “I think the way to invest in this group is to stay with the winner. We think you really have to stay with the strong in alternative energy, and you’ll be paid for that.”

Although Walsh didn’t see as much in the Obama stimulus package for alternative energy as he would have liked, he’s hopeful that other legislation under consideration will give the sector a much-needed boost. If and when that happens he’ll have an investment bucket ready and waiting.


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