A Red Light for Green Investors?

'Green' shoots emerging throughout the energy sector won't necessarily bare the fruit you're looking for.



In many respects, it’s never been easier to be a socially responsible investor, known as an SRI. Eighty SRI mutual funds were available at the start of the decade. That number has more than doubled, according to Morningstar Advisor, as 170 are now offered in three general areas—secularism, faith and ‘green’.

That trend is more evident in green funds, which numbered fewer than 10 only two years ago. Today, green investors can choose from nearly three dozen funds, and, as availability has increased, so has the range of options within the class.

The additional options, however, don’t necessarily mean it’s easier for green investors to be successful. Because many of the green funds have been around only a short time, the managers of those funds haven’t had sufficient time to build any track record of consistent or successful performance.

Ultimately, green investors have to answer this question: Are they willing to accept the possibility of a lower return in exchange for investing only in mutual funds that make investment decisions in alignment with their beliefs and values? That desire doesn’t mean a green investor can’t achieve his or her investment goals. It does mean certain funds that otherwise would be considered because of their consistent performance record are out of the mix because their portfolios are not green-conscious.

Like any investor, green investors first need to establish an investment plan. Their plan should offer the best chance for them to achieve their investment goals based on their overall financial situation, ability to tolerate risk associated with investing, and timeframe. While all socially responsible investors can now achieve more diversification within their area of focus, it doesn’t approach the level of asset diversification most investors need.

For example, a green fund may invest a high percentage of its shareholders’ assets in energy companies. If a fund owns too many companies in the energy sector, shareholder performance could be concentrated too heavily in one sector of the overall economy. Without proper diversification, green investors run the risk that decisions made with their hearts can undermine those made with their minds.

Green investors also have other considerations. They need to understand how a fund company views what its funds own and decide whether their beliefs align with those of the fund company. If a fund company considers nuclear power a green source of energy and chooses to invest in companies that own and operate nuclear power plants, an investor who doesn’t share that view may not want to own shares of that fund.

My recommendation is that investors who want green holdings limit such positions to a small percentage of their portfolios. It’s possible that they may have additional green positions in other funds if those companies are performing well enough that fund managers own them in funds that don’t apply green screens in their analysis.

In the end, all investors should have an investment plan that offers for them the best possibility for reaching their goals through a portfolio reflecting their unique personal situation, at an acceptable level of risk. While it’s easier now for green investors to follow their conscience, it will remain a challenge to build a sufficiently diversified green portfolio until corporate green awareness is more the norm than the exception.

Return to Ingram's August 2009

Adam Bold
is the founder of The Mutual Fund Store®, host of The Mutual Fund Show®  each Saturday on KMBZ 980-AM, and author of two books, including The Bold Truth about Investing.

P     | 913.319.8150
E     | info@mutualfundstore.com