By John Wasik
CHICAGO, April 19 (Reuters) - Green stock funds have always made me blue. There are dozens of socially responsible, "clean-tech" or environmentally friendly mutual and exchange-traded funds, but I have a hard time recommending them. They are typically too expensive because of their fees, have poor returns and are too concentrated in highly volatile stocks.
Take the PowerShares Wilderhill Clean Energy ETF, which holds alternative energy/conservation companies based on a 56-stock index. At nearly $140 million in assets, it's one of the most popular green funds. Yet volatility and poor performance in the portfolio's solar and other alternative energy stocks have produced awful total returns.
The PowerShares fund is down 24 percent and 27 percent for the three- and five-year periods through April 17. It has a 0.7 percent annual expense ratio, which is high for an index fund. More than one-third of the portfolio is in "information technology" stocks, a category that includes several battered solar companies.
The Green Century Balanced Fund has performed better - it is up 7 percent over the past three years, but expenses weigh in at 1.48 percent per year, and that would quickly eat away at any return. Over three years, if you had invested $10,000 in the fund, you will have paid some $468 in fees.
There has to be a better way.
Tom Nowak, a financial planner from Grayslake, Illinois, and author of "Low Fee Socially Responsible Investing" (Createspace, 2012), suggested I create my own portfolio based on some online templates.
Nowak has done this himself. He designed a "fossil free" portfolio, which is a collection of companies that are making progress on reducing their carbon footprint and are recognized by the Environmental Protection Agency for doing so. Nowak assisted in developing the portfolio for Motif Investing (), a relatively new Web site that allows you to buy pre-allocated diversified portfolios based on more than 80 themes, such as "biotech breakthroughs" and "housing recovery" stocks.
Nowak, however, receives no compensation from the company.
Motif will plug in up to 30 stocks on these templates, but you can also customize them or change the weightings. Users are charged $9.95 per trade with Motif, which is a good deal, considering a company like TD Ameritrade charges that much for an unassisted internet ETF trade. There are no management expenses on Motif's ETF-like portfolio, which can be re-balanced once a year and designed to be low volatility.
While the fossil-free portfolio is relatively new, when back-tested for performance in Motif's allocation it returned 17 percent for one year through April 17, compared to 15 percent for the S&P 500 Index. Over the past two years, the fossil-free allocation has gained 36 percent, compared to 27 percent for the S&P.
Although I liked the concept, some of the fund selections bothered me. The controversial agri-tech giant Monsanto Co was in the model portfolio, as was ConAgra Foods Inc , a huge food processor. Other companies with a large carbon footprint such as Walmart Stores Inc and McDonald's Corp were also included. While some analysts consider these green companies because they are working on green issues, it's not exactly what I would be looking for as an investor interested in solid environmental technology.
Fortunately, the Motif platform gave me the ability to delete those stocks. Without Wal-Mart and Monsanto in the portfolio though, the return dropped a point to 16 percent for the last year. However, that still beats the S&P 500.
A more palatable mix for me was in Motif's "Smart Grid" portfolio, which was focused on updating and greening America's aging electrical system. It held the high-tech energy companies ESCO Technologies Inc and EnerNOC Inc. The portfolio was up 30 percent over the two-year period, although it only holds nine stocks. It's gained 26 percent over the past year.
You can also hold similar groups of stocks through Folio Investing (), but the site charges an annual fee from $60 to $290 per year. Or, you could look at the allocations suggested by Motif and match them at your brokerage house of choice.
COMING UP SHORT
The reason why it makes more sense to work with a semi-customized portfolio like Motif's is that it costs less and is more in your control than a true off-the-shelf mutual fund or ETF. If you're going to pay a premium for management, you should get a superior return.
For green funds, in particular, Nowak thinks the price ratios reflect what the market will bear - meaning investors interested in socially responsible options are willing to pay a higher price for them, even if they don't necessarily have to. "It's the so-called `feel good/better investment mix," he says.
But a nettlesome question remains: how much are you willing to give up on performance for your socially responsible objectives? The choices you make may have more to do with your level of patience, as well as whether you are a long-term investor who believes that green companies are the way of the future.
"One has to have a worldview that supports this choice - that is to say - your screening objective is greater than the need to be assured of index/benchmark performance," Nowak says. "If one is confident in their worldview, one might expect to beat the index."
Although individual investors putting their money into a mere handful of companies won't stop global warming or cleanse the environment - we need a national and global energy policy with appropriate carbon taxes - those people could at least say that their consciences are a little cleaner for targeting companies doing the right thing.
In the interim, I, for one, plan to take my bicycle on more errands, grow more of our own food and stay away from shopping malls.