The 2009 Copenhagen climate conference failed to establish a successor deal to the Kyoto Protocol climate change treaty. However, the European Union, China, the US and Japan are still raising investment in renewable energy. And with ‘green’ issues forming a major part of Britain’s new coalition government manifesto, investors might be tempted to look at buying into the sector.
The problem with investing directly in renewable energy stocks is that while their technologies often work, they’re not always commercially viable. Renewable energy often depends on subsidies or feed-in tariffs that put individual firms at the mercy of the regulators in their key markets. Firms are also exposed to the risk of emerging technologies rendering their product obsolete. So this is a sector where funds can be a good way to get exposure to a range of stocks without having to do all the due diligence yourself.
Guinness Alternative Energy Fund (minimum investment £5,000) has a geographical spread of investments and is more balanced than many of its peers. Around a fifth of the portfolio is in Asia. Another plus is that the fund focuses on non-hydro-based renewable technologies, solar (49%) and wind (25%), which have the most growth potential.
The fund isn’t cheap, with a Total Expense Ratio (TER) of 2%. But after an understandably dismal 2008, the fund earned 38.7% in 2009.
If you can’t stomach handing over 2% of your investment a year, then the Blackrock New Energy Investment Trust (LSE: BRNE) is cheaper, with a TER of 1.4%. Over the last five years this fund has managed annualised returns of just under 10%. It also looks good value at the moment – at 42.25p it is trading at 14.4% discount to net asset value.
The fund focuses on wind energy as its top non-hydro renewable choice for utilities, with some emphasis on niche solar. Also, unlike the Guinness fund, it includes biofuels in the portfolio.
The downside is that it is largely focused on the US and Europe, with only 6.4% of the fund invested in Chinese companies. Sure, it has indirect exposure to Asia through the sales of its main holdings, such as American Super Conductor.
Yet in the long-term indigenous Chinese firms are expected to gain more domestic market share. However, of course, the flipside is that Chinese stocks arguably operate in a more risky political environment. Given the hefty discount and the cheaper TER, Blackrock would be our preferred bet in the sector.