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Surfing The Sustainable Investing L-Curve: A Noble Way To Lose Money?

By AllAboutAlpha Market OverviewAug 27, 2013 12:30AM ET
Surfing The Sustainable Investing L-Curve: A Noble Way To Lose Money?
By AllAboutAlpha   |  Aug 27, 2013 12:30AM ET
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Even if you’re the very model of a modern money manager, kitted out with a Sustainable Investing Officer and all, what would a bold plunge into a green investing model have done for your returns in recent years?

The divesters aren’t just against fossil-fuels. They also “advocate for,” as they would probably say, investments in alternative/sustainable/green/clean energy. Once they get the kinks out of wind and solar, they maintain that renewables are the wave of the future—where the big money will be made.

Harvard Vice President of Sustainable Investing Jameela Pedicini’s old boss, CalPERS chief investment officer Joe Dear, came to New York in March for the Wall Street Journal’s big, green ECOnomics conference, and he wasn’t bringing good news for green investors.

According to the Journal, Mr. Dear told the conferees that a $900 million CalPERS fund devoted to clean energy and technology (which started in 2007 with $460 million) has had an annualized return of minus 9.7% to date.

“We’re all familiar with the J-curve in private equity,” he said. “Well, for CalPERS, clean-tech investing has got an L-curve for ‘lose.’ Our experience is that this has been a noble way to lose money. And we’re not here to lose money. We have dialed back.”

Mr. Dear added that CalPERS may look again at clean-tech investing if the profits and returns are there, “but if it takes 12 years to get the money out, the internal rate of return is not going to very good, even if the investment is reasonably successful.”

Big institutional investors like CalPERS and Harvard Management Company can pursue an idea through channels not available to ordinary retail investors. They can buy into private equity and venture capital partnerships; set up separate accounts with expert, active managers to invest in public markets; and generally get access to the smartest, best-connected people in any niche.

But even if you’re just a civilian without those tools, you can still take a flyer in green investing. The divesters may be suspicious of capitalism, but the capitalists don’t take it personally. They’ll invent and sell a “sustainable” index fund just as readily as they’ll sell you a fossil-fuel ETF (like, say, Market Vector’s poetically named KOL which is a bet on the coal industry).

We found seven indexed ETFs which claim to track green energy stocks and which started up before 01 July 2007. There are some other newer ones, but we prefer to look at five-year returns. We can think of these funds as a proxy for the publicly investible green assets. With these, we could figure out how pure-hearted green investors would have done in the fiscal five-year period July, 2007 to June, 2012.

And, in case you were wondering, Barclay’s iShares unit does have an ETF in this niche, but their iShares S&P Global Clean Energy Index Fund (ICLN) didn’t launch until 2008, so we left it off this list.

We’re not sure this list is exhaustive, but we think we have corralled most of the relevant ETFs. There are others tracking things like nuclear energy and natural gas, which could plausibly be called investments in carbon-reduction, but the divesters would probably object to those, so we left them out, too.

The smart people who compiled those various indices, between them, have been screening the world’s public markets pretty thoroughly for green equities over the past five years, rebalancing every month, in most cases. So, how have they done?

Here are the closing market prices for 01 July 2007, 01 July 2009, and 30 June 2012:

Ticker 01Jul07 Closing Price 01Jul09 Closing Price 30Jun12 Closing Price 3-yr percent change

Like Mr. Dear’s clean-tech fund in the same period, every one lost money over five years.

Over the most recent three years, four lost money, two made money, and a third broke even.

We constructed a notional weighted-average super-ETF from these seven using their current market caps. That gets us to a crude guesstimate of how the whole group would have performed if you had spread your money over all of them.

For five years, the annualized change in market value on our super-ETF was about -10.5% and over three years 2009-2012, it was about -2.4%.

So, it appears that the bets available to a green investor in the public markets would have done even worse than Mr. Dear’s PE investments since 2007, though not by a wide margin.

A million dollars spread proportionately across those seven ETFs in July 2007 would have been reduced to about $575,000 by June 2012. A million invested over 2009-2012, when returns were better, would still have been reduced to about $929,000.

Recall that the S&P 500 over 2008-2012, including its full ration of oil and gas stocks (about 10% of the index), returned 0.2%; and a 60/40 stock/bond blend got you 2.8%.

What are these funds investing in? Well, the current fave is Elon Musk’s Tesla Motors. It’s their largest single holding, with about $15 million held by GEX, PBW, and QCLN. It only debuted in 2010 and the stock hadn’t done much by 2012. But it has quintupled in the last eight months, as they finally introduced their Model S sedan. So, the heavy weighting in some of these ETFs is going to make them shine this year. Tesla makes their sleek electric cars in an old GM plant in Fremont, Calif., across the bay from my office. It’s right by the abandoned factory of another green start-up that foundered. Remember Solyndra?

The green ETFs also hold a big chunk of Solar City, which just went public in December and has quadrupled this year. That’s nice for the ETFs who got in early, although a lot of the big money was made in the IPO by the venture capitalists seeding the company, including such prominent names as Silver Lake Kraftwerk, Valor Equity Partners and Mayfield Fund.

This was a big deal here in northern California, where green-related startups had been under a curse since Solyndra folded in 2011, taking down not only its private funders, but $500 million in federal loan guarantee, now chargeable to the taxpayers.

It happens that Tesla Motors founder Elon Musk is also a co-founder of Solar City, and first cousin of Solar CEO Lyndon Rive. Mr. Musk personally had a big payday as the stock boomed. Solar City’s innovations have more to do with novel financing of solar installations than with technology, but the customers and investors both seem happy.

So, maybe the green investors will prosper in the end. But, as Kermit the Frog remarked, “It isn’t easy being green.”

One of the biggest holdings in these funds is SunPower, the U.S. solar- panel maker. Even though it’s down about 80 percent since 2008, any divester will still like the sound of it. But they better not look under the hood. Even though it still sits in all the green indexes, it’s now owned mostly by the giant French oil company Total, one of the divesters’ prime targets.

Charles A. Skorina & Co is retained by the boards of institutional investors and asset managers to recruit chief investment officers, portfolio managers, and financial professionals.

Charles Skorina earned an MBA at the University of Chicago and began his professional career at Chemical Bank (now JPMorgan Chase), completing the management training program then working as a credit and risk analyst in New York and Chicago. After a stint with Ernst & Young in Washington, D.C., he founded his own search firm headquartered in San Francisco, focused on the global financial services industry.
Surfing The Sustainable Investing L-Curve: A Noble Way To Lose Money?

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Surfing The Sustainable Investing L-Curve: A Noble Way To Lose Money?

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