Green Stocks: A Better Way to Play? 8 comments
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My Quick Clean Energy Tracking Portfolio continues to outperform all benchmarks and expectations... is it luck, or did I stumble onto a better way to invest in green energy stocks?
I continue to be stunned at how the portfolio which I intended as an easy way to duplicate green energy mutual fund performance at much lower cost continues to blow those green mutual funds out of the water. I last published an update on this portfolio at the end of May, and was shocked to find that it had beaten the funds it was intended to replicate by over 20% in 3 months. The trend continues... it's now almost 7 months later, and the portfolio has widened its lead over the mutual funds by 30%.
Winners and Losers
In May, I hypothesized that the out performance might have been due to how I constructed the portfolio: I chose five stocks from the top holdings of the mutual funds which had performed worst over the preceding three years. I did this because there is a fairly well-documented winner-loser effect [pdf], that shows systematic price reversals in stocks that show long-term gains or losses. In particular, stocks showing long term losses are more likely to make gains in following years than long term winners.
I tried to test if the out-performance was solely due to winner-loser effects by going back to my original data and seeing how a portfolio constructed with winners rather than losers would fare. To my surprise, the "winners" portfolio also significantly outperformed the mutual funds (by 10% over 3 months). I've updated the performance of the "winners" portfolio as well, and it also has increased it's gains compared to the mutual fund portfolio, and is now outperforming by 15% over 7 months.
Winner-loser effects seem to be playing a role, but at most, they explain about a quarter of the out-performance of the "Losers" portfolio so far. There may be other, as yet unknown, causes of the superior performance of the "Losers" portfolio.
No matter what the cause, for winner-loser effects to explain all of the difference, the "Winners" portfolio would have to be under-performing the mutual funds by about as much as the "Losers" portfolio is outperforming. Where did the other three quarters of the out-performance come from? Is it just luck?
"Losers" Tracking Portfolio
| Company | Shares | Price 2/27/09 | Close 9/24/09 | % Change |
| Citrix Systems (CTXS) | 48 | $20.58 | $37.65 | 82.94% |
| Echelon Corporation (ELON) | 165 | $5.99 | $12.82 | 114.02% |
| SunTech Power (STP) | 162 | $6.09 | $15.96 | 162.07% |
| Cemig (CIG) | 94* | $10.47* | $14.66 | 40.02% |
| Vestas Wind Systems (VWSYF.PK) | 22 | $44.85 | $69.50 | 54.96% |
| Total | $4998.65 | $9,415.06 | 88.35% |
*Dividend and split adjusted.
"Winners" Tracking Portfolio:
| Company | Shares | Price 2/27/09 | Price Close 9/24/09 | % Change |
| LSB Industries (LXU) | 114 | $8.66 | $15.34 | 77.14% |
| Echelon Corporation (ELON) | 165 | $5.99 | $12.82 | 114.02% |
| First Solar Inc (FSLR) | 9 | $105.74 | $150.62 | 42.44% |
| South Jersey Industries (SJI) | 28* | $35.11* | $34.83 | -0.80% |
| American Superconductor (AMSC) | 23 | $13.46 | $29.73 | 120.88% |
| Total | $4975.30 | $8,394.90 | 71.10% |
*Dividend adjusted.
Mutual Fund Portfolio
The Other Three Quarters
Since I did the first update, I've come up with three hypotheses to explain the phenomenon:
- Higher Beta: The stocks I picked may be more sensitive to market moves than the mutual funds as a whole. Since the market has been rising, the "Winner" and "Loser" portfolios have been rising more.
- Cleantech sectors: My picks put more emphasis on certain Cleantech sectors than do the funds; perhaps the overweight sectors have driven the out-performance.
- Mutual Fund Manager skill: The mutual fund managers are likely to hold more of their favorite stocks than they hold of other stocks. If they each have a few good ideas, then I am taking advantage of those good ideas by selecting my portfolios from the mangers' top five holding. The high diversification of the mutual funds keeps mutual fund shareholders from fully benefiting from their managers' skill.
Below, I've graphed the performance of the "Winner" and "Loser" portfolios against several possible benchmarks: the blended performance of the mutual funds, the S&P 500 index, and five green energy ETFs (ICLN, QCLN, PBW, PBD, and GEX.) Since the ETFs each track a difference index for the Cleantech sector, it's reasonable to assume that they represent the performance of the average Cleantech stock.
This promises to be a fairly long investigation, so I plan to break it up into a series that I'll publish over the next few days. I'll add links to the articles here as I publish them. The first one, in which I look into my "Higher Beta" hypothesis, will be published here shortly.
It could turn out that none of my hypotheses explain the out-performance we've seen. In that case, it could be luck, or it could be something I have not thought of.
Easy Green Money... Too Good to be True?
I'm hoping that I find some evidence for mutual fund manager skill. To do that, I'll need to eliminate the other possibilities. If I can, we can expect this method to produce out-performance in the future, and under any market condition. In other words, my attempt at a tracking portfolio might just be a better way to play green stocks. An easy way to play green energy, without having to pay high fees? It sounds to good to be true, but in the wild west of green energy investing, in might last for a year or two.
What do you think? Is there something else I should investigate? If so, please leave your suggestion in the comments.
DISCLOSURE: Tom Konrad and/or his clients own LXU, ELON, and AMSC. The Guinness Atkinson Fund is an advertiser on his website, AltEnergyStocks.com
DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.
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1) To compare returns without adjusting for risk (not to mention management fees, or taxes is foolhardy, at best. A CFA should know better than that.
- The mutual funds are tax-inefficient, have high management fees, and less liquid, and rarely beat the indexes.
- One could have bought a Russell 3000 ETF or other similar Indices and gotten similar returns at lower risk and cost, or it one wanted to stay consistent with the green theme, bought PZD and still taken less risk and earned about 60% ROI.
- Dr. Konrad's inclusion of non green or alternative energy companies certainly undermines his claims as well.
a) SJI - South Jersey is predominantly a regulated energy utility - nothing green about that rate hikes and demand are what drives its profits.
b) what on earth is Citrix doing here? Is this a typo?
c LXU: LSB Industries is still first a manufacturer of bulk chemicals, many of them very nasty. It has a hydronic and ground-source heat-pump business, but it's not a very "clean or green" company
3) Playing such short-term movements is not really investing, but rather trading or speculating. Dr. Konrad hasn't shown us any long-term outperformance, but rather cherry-picked data.
ELON was the only smart grid company I came up with, so it had both the best and worst 3 year returns for smart grid.
On Sep 28 02:47 PM attofarad wrote:
> How did ELON end up in both the winners and losers?
1) This is not cherry-picked data... this portfolio was designed to be a track the mutual funds at lower cost with more tax efficiency. It did not work that way; why I'm trying to do now is figure out why. The risk adjustment you suggest is what I'll be looking into in the second article in the series. Other adjustments will follow if that does not prove sufficient explanation.
a,b, and c) Please read the original article where I constructed the portfolio (Click on the very first link in the article), and you will understand how all the stocks you object to got there: They were selected from the portfolios of the mutual funds I'm comparing them to.
2) I don't know how you can disagree with my analysis, since my analysis was "This portfolio outperformed and I'm not sure why, but I'm hoping I'm on to something." I have not shown anything yet, except that I've stumbled across something worth looking into.
On Sep 28 03:15 PM danno wrote:
> I am very skeptical of Dr. Konrad's analysis.
>
> 1) To compare returns without adjusting for risk (not to mention
> management fees, or taxes is foolhardy, at best. A CFA should know
> better than that.
>
> - The mutual funds are tax-inefficient, have high management fees,
> and less liquid, and rarely beat the indexes.
>
> - One could have bought a Russell 3000 ETF or other similar Indices
> and gotten similar returns at lower risk and cost, or it one wanted
> to stay consistent with the green theme, bought PZD and still taken
> less risk and earned about 60% ROI.
>
> - Dr. Konrad's inclusion of non green or alternative energy companies
> certainly undermines his claims as well.
>
> a) SJI - South Jersey is predominantly a regulated energy utility
> - nothing green about that rate hikes and demand are what drives
> its profits.
>
> b) what on earth is Citrix doing here? Is this a typo?
>
> c LXU: LSB Industries is still first a manufacturer of bulk chemicals,
> many of them very nasty. It has a hydronic and ground-source heat-pump
> business, but it's not a very "clean or green" company
>
> 3) Playing such short-term movements is not really investing, but
> rather trading or speculating. Dr. Konrad hasn't shown us any long-term
> outperformance, but rather cherry-picked data.
I realize my last comment was not very clear. To understand the construction of the portfolio, please click on the first link in the story:
" Clean Energy Tracking Portfolio"
On Sep 28 02:47 PM attofarad wrote:
> How did ELON end up in both the winners and losers?
On Sep 28 04:06 PM Tom Konrad wrote:
> Danno,
>
> 1) This is not cherry-picked data... this portfolio was designed
> to be a track the mutual funds at lower cost with more tax efficiency.
> It did not work that way; why I'm trying to do now is figure out
> why. The risk adjustment you suggest is what I'll be looking into
> in the second article in the series. Other adjustments will follow
> if that does not prove sufficient explanation.
>
> a,b, and c) Please read the original article where I constructed
> the portfolio (Click on the very first link in the article), and
> you will understand how all the stocks you object to got there: They
> were selected from the portfolios of the mutual funds I'm comparing
> them to.
>
> 2) I don't know how you can disagree with my analysis, since my analysis
> was "This portfolio outperformed and I'm not sure why, but I'm hoping
> I'm on to something." I have not shown anything yet, except that
> I've stumbled across something worth looking into.
Your green portfolio seems overly concentrated on one clean energy sub-sector: Solar. This is a large part of why you have such wild gyrations (plus the fact that solar is probably the most volatile clean energy sector.) I think choosing only one stock per clean energy subsector will greatly reduce the volatility of your portfolio.
Here are a few suggestions to consider: www.altenergystocks.co...
Another good place to look is in the portfolios of the green energy mutual funds and ETFs, as I did in the article where I created these portfolios.