The Roen Financial Report closely covers the universe of almost 30 alternative energy Mutual Funds (MFs) and Exchange Traded Funds (ETFs). We use a proprietary ranking method to pick the best funds, looking at measures that include fees, risk, tax liability, and the financial health of individual holdings within each fund. In the latest round of rankings, all top rated funds retain their premier slots.
Subscribers can see the complete list of funds, including rankings and technical breakdowns, in both Excel and PDF format, by going to www.roenreport.com/mfsetfs/ .
2012 was a good year for alternative energy mutual funds. On average all funds returned over 9% for the year, with over half the funds posting gains of 15% or better. The best performing funds were Allianz RCM Global Water (AWTAX) and Pax World Global Environmental Markets (PGRNX). Both had annual returns in the 20% range.
These two best performing funds for the year have also dropped one notch from their Rank 1 status (see rankings here). The fund that declined most in rank was Calvert Global Alternative Energy A (CGAEX), which now rests at a Rank 5. This drop is accredited to shortcomings in the mechanics of the fund, including its high expense ratio relative to the other alternative energy mutual funds, and a low “Alpha” (essentially a measure of the value a fund’s manager brings to the portfolio).
It is interesting to note that the funds which performed the worst for the year overall, Guinness Atkinson Alternative Energy (GAAEX) and Firsthand Alternative Energy (ALTEX), also performed best in the past month. This goes to show that chasing performance, especially on mutual funds, is usually not the best way to pick an investment. A much better approach is to look at multiple criteria in order to determine the fund most likely to have good returns going forward.
I see good opportunity in putting fresh money in several funds at this time. Mutual funds that look attractive now are AWTAX, New Alternatives (NALFX), Portfolio 21 R (PORTX) and Alger Green A (SPEGX). These are all Rank 1 or Rank 2 mutual funds, and the average underlying security in the fund is considered to be trading at below fair value.
Exchange Traded Funds
Alternative energy ETFs did not fare as well as MFs in 2012. The average ETF lost 3% for the year, though the number of ETFs that were up for the year were the same as the number that showed losses. The average gainer was up 9%, and the average loser was down over 15%. This discrepancy between returns on MFs and ETFs shows that having a professional manager actively overseeing investment decisions in a fund can make a great difference in net long-term returns.
The ETF with the best annual return was First Trust NASDAQ® Clean Edge® Smart Grid Infrastructure Index Fund (GRID) which held four stocks that gained over 50% for the year: AZZ, Inc. (AZZ), Prysmian (Milan:PRY), Valmont Industries, Inc. (VMI), and MasTec, Inc. (MTZ). In fact, over half the shares that this ETF held had annual gains over 15%.
PowerShares WilderHill Progressive Energy Portfolio (PUW) got bumped up to a Rank 1 due to its many positives, including good returns at moderate risk (see heat map below). Investors should be aware, though, that PUW has a high potential capital gain exposure due to the increased value of its holdings. An ETF that looks good to me at current prices is Market Vectors Solar Energy ETF (KWT). It holds at Rank 2 ETF, and is considered undervalued.
The graph above shows ETFs sorted by annual return, from largest to smallest, illustrated by the dark blue bars. The light blue bars show three month returns, which in this case have almost no correlation to annual returns. In fact, as with the MFs above, the two worst 12 month performers, Guggenheim Solar (TAN) and KWT, posted the best three months performance.
Remember to always consult with your investment professional before making important financial decisions.