Alternative-Energy Funds See Renewed Buying by Investors – WSJ

Via Wall Street Journal:

The Sector Has Been Posting Gains Again, After Big Losses

While the boom in U.S. natural gas has generated excitement among investors and companies alike, the renewable-energy sector has been having a moment of its own.

Investors are pumping more money into funds and projects dedicated to clean energy, such as solar and wind power. Technology advances have helped make the sector more competitive and helped generate a turnaround in company share prices, which had slumped since the financial crisis.

Alternative-energy mutual funds and exchange-traded funds—which include investments in hydropower, wind and solar—returned an average 41.6% over the 12 months through June, according to the Lipper unit ofThomson Reuters Corp. They pulled in $365 million in net new cash from investors over the 12 months through May, according to Lipper. But the comeback of this very small group of funds is still a nascent one after several rocky years. With about $1.67 billion in assets, these funds are only about half the size they were at their 2008 peak.

The first wave of clean-energy investing came around 2003 and 2004, as renewable-energy laws in Europe, high oil prices and abundant financing triggered growth. Then the financial crisis—and a rapid decline in the prices of solar modules and wind turbines—sent investors running. Between 2008 and 2012, alternative-energy funds returned an average minus 64%, according to Lipper. But now that prices have stabilized at lower levels and renewable energy has become more competitive, investors are wading back in.

“Investors are really revisiting the story after a number of years,” says Colm O’Connor, portfolio manager of the $108 million Calvert Global Alternative Energy, who calls this the “second era” of clean-technology investing. “Though investment in the space has shot up recently, we think we’re just scratching the surface.”

Mr. O’Connor says the fund currently favors solar project developers and operators, companies manufacturing raw materials for solar panels and the energy-efficiency sector.

Improved technology and recent growth in the industry have resulted in lower production costs and lower prices for clean energy sources like solar power. That is helping pave the way for a time when the industry can compete with less in government incentives, investors say.

“The cost for solar and wind technology in the last five years has been reduced dramatically,” says Kevin Walsh, managing director, power and renewable energy, at GE Energy Financial Services, the energy investing business of General Electric Co.

His firm, which invests directly in renewable-energy projects, made its first equity investment in Ireland’s wind-power market earlier this year by acquiring two wind-farm construction projects. Last year, its investments included a large solar project in California and a hydropower project in India.

Much of the revival in clean-energy investing stems from abroad as some foreign governments push for cleaner domestic energy sources to reduce pollution and provide access to electricity in remote areas. China, India and Japan are among the key markets driving up demand, investors say.

New investment in renewable energy in Asia rose 10% to more than $100 billion in 2013, according to an Ernst & Young report.

Still, investors say they need to examine potential investments carefully, and make sure companies and projects are competitive and poised for longer-term gains, not just a short-term boom.

“We do think that the market is volatile,” says Ken Locklin, a managing director of Impax Asset Management Group PLC, a London-based specialist investment manager with $4.2 billion in assets under management. Nevertheless, in recent years Impax has added wind and solar holdings to its $1.5 billion portfolio of small-cap and midcap environmental stocks to bring its renewable energy assets to about 14% in April, up from around 8% in 2008.

Ms. McCarthy is a reporter for The Wall Street Journal in New York. Email: