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The changing energy paradigm…Sentry Select Alternative Energy Fund

You have to feel a little sorry for the unfortunate child being born in Los Angeles these days. A two-week-old baby in the LA area has already been exposed to more toxic air pollution than the U.S. government deems acceptable as a cancer risk over a lifetime, according to a report published by the National Environmental Trust. It said diesel exhaust – from trucks and cars, school buses, and farm and construction equipment – was still the worst source of air pollution.

The ongoing degradation of the air and water upon which human existence depends is of course just one of the symptoms of our global dependence on fossil fuels. The potentially calamitous effects of continued global warming have galvanized a broad cross-section of government and business into seeking solutions to this challenge. It has been clear for some time that much of the world’s economic growth has come at the expense of the environment. If the collective will truly exists to wean society from it’s dependence on oil and other fossil fuels, then increased investment in alternate energy sources is an obvious imperative.

It is well known that new technologies often undergo rapid price reductions as the volume of production increases. This has been most visible in recent years for computers and holds true for most complex mass-produced equipment. Emerging clean and renewable energy technologies such as fuel cells, wind turbines, photovoltaic cells, and cellulosic ethanol are all undergoing rapid cost declines as research, development, and production volumes increase. The cost of wind-generated electricity has fallen by more than a factor of five since the mid-1980s and costs are expected to continue to decline rapidly in the coming decade. In 2000, more new wind capacity than new nuclear capacity was installed worldwide, and Germany replaced 1% of its entire generating capacity with new wind turbines.

Of course there is no shortage of vested interests that would like us to believe that ratification of the Kyoto Accord addressing global climate change would result in massive economic hardship. To which I would reply a) there are numerous studies that dispute this contention (see for example the U.S.-based Economic Policy Institute’s package of recommendations regarding energy policy), and b) that global economic health is not exclusive of, but dependent upon the health of the world’s social and environmental systems.

Investors have an enormous role to play in the ongoing shift towards cleaner fuels. However, one should exercise extra caution and patience when purchasing shares in alternative energy companies. Many of these technologies are years away from proving themselves commercially and the world’s existing energy infrastructure will likely take generations to replace. There is not a single major car manufacturer that is prepared to introduce fuel cell powered vehicles to the mass market before 2010. Nevertheless, the share of our planet’s energy grid devoted to alternate sources is clearly going to increase, and this alone makes the investment opportunities intriguing.

There are a couple of ways to invest in the alternative energy field beyond the purchase of individual stocks. The only mutual fund in Canada that is purely devoted to owning shares in this sector is the Sentry Select Alternative Energy Fund. The managers of this fund have selected 25 companies involved in the manufacture of fuel cells, solar and wind power, power management products and other specialty technologies. Since it’s introduction a year ago, the fund has definitely had its share of difficulties, perhaps indicative of the challenge in bringing promising technologies to market. However in their defense, it should be noted that anything to do with technology has been absolutely decimated by the markets in the last 2 ½ years. In this environment, investors have no interest in promise or potential, they want to see real earnings, and the alternative energy market is generally not yet the place to find them. An exception can be found in one of this fund’s components, as they provide a way for Canadian investors to participate in the success of the Danish company Vestas Wind Systems. Vestas is the world’s leading manufacturer of wind turbines, and one of the few companies in the Sentry Select Alternative Energy Fund that is already earning a profit.

A very different way to participate in the alternative energy sector is through shares in the Clean Power Income Fund, a unit trust that I have introduced in a previous column. This trust has invested in 10 different environmentally-friendly energy facilities across Canada and the U.S. The fund currently returns approximately 9% a year to it’s unitholders and is very highly-rated for it’s cash flow stability.

Bill Ford Jr., chairman of Ford Motor Company and great-grandson of Henry Ford, pioneer of the car-based society, has said he wants to preside over the end of the internal combustion engine and produce totally recyclable cars which clean the air while they drive. If Ford and other progressive business leaders back up their words with action, then the environment, society and investors all stand to benefit.

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