Making 'green' investments grow takes research, patience

DALLAS - The growing trend toward clean and alternative energy sources represents an investment opportunity for those who do it right.

But to make more green from "green investing," investors have to cut through the hype, determine what's a fad and what technology has lasting power and lucrative potential.

Otherwise, your green investment could turn brown like a dead leaf. Investors view the environment as a major long-term investment opportunity, according to a survey by Allianz Global Investors, whose Allianz RCM Global EcoTrends Fund invests in companies that have exposure to or benefit from the alternative energy, pollution control and clean water industries. "The environment is a fertile investment area at an early stage of growth," said Bozena Jankowska, lead portfolio manager for the fund. "It is one of the few sectors where the public and politicians are in alignment and inclined to act." Finite resources such as oil, metals and even fresh water will become scarcer and more expensive, she said. "If businesses do not become more efficient in their use of these resources, costs can mount and ultimately impact the bottom line," Jankowska said. "This goes beyond just wanting to do good. It ultimately comes down to good business sense." As with any investment, you need to do your homework before diving in. "Someone who is considering buying a green stock should go through the same steps as he or she would when buying any other stock," said William Reichenstein, a finance and investments professor at Baylor University. "Consider its valuation compared to comparable stocks, its industry, and the stock market. Make sure the stock fits into your overall portfolio." You have to cut through the hype, and when it comes to green investing, there's plenty of it. Don't expect to reap rewards immediately. "The hype is that people are going to say, `Oil is $100 a barrel, and it's still continuing to go up, and of course we have to move toward clean tech,'" said Jack Uldrich, author of Green Investing. "It's easy to sell the potential of clean tech, and global warming also adds to that. "But step back and understand that for all of oil's negatives, society, industries, don't change that fast." So you should look at green investing as a "10-, 15- and maybe a 20-year investment opportunity," Uldrich said. If you're going to buy individual stocks for your green investing, make sure you understand each technology and its money-making potential. Can it sustain its use-fulness? "Does the technology make sense financially?" said Brian Jacobs, managing director and head of sales at Allianz Global Investor Distributors. "Is the company sound? Does it have the finances it needs to be sustainable in the future?" At Odyssey Advisors Inc. in Los Angeles, "We don't invest in companies unless we see a competitive advantage that's confirmed by strong orders, a rising backlog or an increasing market share," said Paul Woods, chief executive of the firm that manages a portfolio of "clean energy" stocks. "The only way to cut through the hype is to do your own research, and that's a very tall order because most of what you hear is garbage," Woods said. That's the challenge if you invest in green technologies through individual stocks. Do you have the time to do the research and stay on top of this rapidly evolving field? "It's really difficult to do this, especially as an investor," said Brian Bruce, director of the Finance Institute at Southern Methodist University's Cox School of Business. "If you want to invest in this trend, find people who have done socially responsible investing for a long time and who have a lot of expertise and invest in a green mutual fund, and let them make the judgment calls." It helps if the fund manager has a scientific background, said Jacobs of Allianz Global Investor Distributors. That person can understand a technology "intuitively, as opposed to taking the word of a scientist at the company," he said. Jankowska, lead manager of the EcoTrends fund, is an environmental scientist, with a specialty in business and the environment. "If you have someone who has both the scientific background, as well as the financial acumen _ by combining the two _ then you're giving yourself a better opportunity to pick winners in this market," Jacobs said. What's more, a professional investment manager has the resources to evaluate green investment opportunities outside the U.S., Jacobs said. "Manager experience, important in any mutual fund, is especially pertinent in green investing," Michael Herbst, a fund analyst at research firm Morningstar, wrote in a November article. "Many companies in green industries such as solar, wind, and biofuels are early-stage firms and thus carry the risks common to all small-cap growth stocks." They can also be subject to the same cyclical pressures that buffet traditional energy stocks, he said. "As a result, we'd favor management teams that have been around the block a few times and are familiar with the pitfalls of small-cap stocks and the volatile energy sector," Herbst said. "We'd also prefer to see teams with deep research resources, in part because government regulation, which varies by country and is constantly evolving, can have a big impact on green companies." Much of the growth in alternative energy and climate change investing has been through what's called "exchange-traded funds." ETFs trade like individual securities on an exchange, while mutual funds are priced once daily at the market close. "You need to be careful about what kinds of things those types of (clean energy, sustainable energy) ETFs own because a lot of them invest in fairly risky companies," said David Kathman, a fund analyst at Morningstar. "A lot of them are start-ups, which tend to be fairly risky." In any case, don't bet the farm on green businesses. "Many green industries are young and likely to experience growing pains," Herbst said. "Rel-evant governmental regulation or subsidies can change quickly, either making or breaking a one-product firm's fortunes. And smaller-cap green stocks can sometimes be difficult to trade. Lack of diversification can also be problematic."