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August 17, 2006
Alternative Energy Revolution Fueled by New Fund Launches Despite Sector Downturn
    by Bill Baue

The launch of the Guinness Atkinson Alternative Energy Fund testifies to optimism about the sub-sector echoed by the launch of the first renewable energy hedge fund by Ardsley Partners.


Even as alternative energy stocks are on a three-month downward slide, alternative energy investing continues to gain momentum with the launch of new funds, such as the Guinness Atkinson Alternative Energy Fund (ticker: GAAEX) that debuted on March 31. Ironically, the fund's benchmark--the WilderHill Clean Energy Index (ECO)--had been on fire since its August 16, 2004 inception at $126.59 until May 8, when it had doubled to $254.40. Since then ECO has been on downward slide to bottom out at $176.17 this Monday--and the Guinness Atkinson fund is down 10.80 percent from inception through July 31. However, the index has been creeping back and closed at $188.44 yesterday.

Interestingly, portfolio manager Tim Guinness has been running funds in the energy space since 1998 and therefore kept a left eye on alternative energy stocks, but tended not to invest in the emerging sub-sector as there was much better value available in conventional energy companies.

"We missed the 80 percent bounce in alternative energy from depressed levels in 2003 and 2004 but didn't worry overmuch as our conventional energy stocks were up 85 percent over the same period," Mr. Guinness told SocialFunds.com.

Size was also a constraint--its main energy funds maintain a $1 billion market capitalization threshold.

"This excluded most of the companies in the alternative energy space, and yet we could see that there was significant potential in many of these smaller stocks," says Mr. Guinness. "With oil at more than $50 a barrel and dwindling fossil fuel resources, we know that there will have to be a shift towards alternative energy sources."

"The prospects of many alternative energy companies are transformed if oil settles at $85 a barrel and we have begun to see that as an increasingly likely scenario," he adds. "We decided therefore that we should offer a fund that could practically invest in alternative energy stocks and enable our investors to have a way to potentially benefit from the improved economics of and structural shift towards these companies that will result if this happens."

Guinness Atkinson has lowered its market cap threshold to $50 million for companies in its alternative energy fund. It also takes a pure play approach to screening its universe.

"Stocks must have more than 50 percent of their revenue from businesses that are related to alternative energy sources," says Mr. Guinness. "We note that other funds in the space also have investments in several larger companies where a much smaller percentage of revenues is derived from alternative energy."

"The effect of this is to reduce the downside risk, but also to cap the potential upside," he points out.

Guinness Atkinson reduces risk by diversifying it across a portfolio of 40 to 60 US and international holdings. This international exposure differentiates it from its benchmark, as ECO is comprised of US companies. The top five holdings of the fund are Germany-based wind turbine producer Nordex (NRDXF.PK), Australian Ethanol (ASTUF.PK), and UK-based Clipper Windpower (CWP.L), ethanol producer Renova Energy (RVA.L), and fuel cell company Ceres Power Holdings (CWR.L).

Interestingly, US-based Evergreen Solar (ESLR) fell off the top ten holdings list (from position four as of June 30), as the company's share price has nearly halved from $16.00 on April 19 to a low of $8.22 this Monday. This timing may not be a coincidence.

"The recent downturn in alternative energy stocks is related to a number of factors--principally, the Nasdaq Index has fallen by 12 percent since April 19," Mr. Guinness says. "The sector is still in its infancy, so a number of the companies are technology companies with products at early stages in the lifecycle, and so they have been negatively impacted by the market move.

"Prior to the correction, as oil moved above $70 there was a marked increase in general enthusiasm for investing in the sector and valuations moved up to high levels with the stocks as money flowed in, but we now feel that much of this hype has been deflated," he continues. "To address this, we maintained a cash balance as the market declined, and have increased our holdings in stocks that we believe have seen an overreaction--we think that this downtown is providing us with a number of opportunities to get into stocks at attractive valuations."

The downturn has not overly dampened the enthusiasm for other forms of alternative energy investing as well. For example, the Ardsley Partners Renewable Energy Fund launched in early July as one of the first hedge fund focusing exclusively on alternative energy companies (both public and private). As with Guinness Atkinson, Ardsley Partners is not dipping its toes into the sub-sector for the very first time--it has been incrementally building a renewable energy position in its flagship fund for the past two years to the point that it now represents 15 to 17 percent of that fund.

While Ardsley is now one of the larger public equity players in alternative energy, the space is driven even more aggressively by private equity. More than $360 million of private equity and venture capital has filtered into clean energy companies this summer alone, according to statistics from VCDeal.com. Just yesterday, for example, biodiesel company Renewable Energy Group announced a $100 million deal.

"The alternative energy revolution has only just begun," states Mr. Guinness in the March 2006 special report on the sector.

 

 
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