Where to Invest When the Market's a Mess

Regular stock-market investing may not offer traditional returns over the next few years -- so investors will likely need to look to other areas to get outsized returns.

The S&P 500 was up only 5.49% (with dividends) in 2007, and 2008 has come out of the starting blocks very poorly. Uncertainty about when the financial sector's woes will end creates visibility (not certainty) for continued weak performance and the need to seek returns elsewhere.

It might make sense to seek out a couple of possibilities for "elsewhere" in case this theory turns out to be correct.

One small segment I recently discovered: income funds from Canada, which are kind of an offshoot from the Canadian energy trusts that pay big yields. They were severely impacted when Canada passed legislation changing trusts' taxation in 2011.

The Algonquin Power Income Fund(AGQNF Quote) particularly caught my eye.

At first glance, the business mix -- hydroelectric power, water infrastructure, cogeneration and alternative energy -- seems to hit several important themes that, in addition to addressing certain needs, have very little in common with the U.S. economic cycle. By extension, the business would also have very little in common with the U.S. stock-market cycle.

In addition, the fund has enough cash flow to cover its 13% dividend. Earlier this decade, the fund was having trouble with this. Last year, however, it was able to cover the dividend and expects to be able to cover it this year as well.

While that all sounds good, there are plenty of question marks that make the fund very confounding.

It has a lot of debt -- $200 million, versus $500 million in equity. The fund is facing a larger tax bill in 2011 under its current structure. It relies on the capital markets for both debt and equity to pay for new projects, but it had to pull a deal last fall because of poor market conditions.

Its BBB+ rating makes debt potentially expensive, especially now that panic has sent spreads to very wide levels.

Hydroelectric sounds like a great way to generate power, unless it doesn't rain a lot (which is currently threatening all sorts of economic activity in Chile, which gets 40% to 50% of its electricity from hydroelectric).

Finally, the price action has not been good. As explanation, a spokesperson for the company posited that because of the fund's relatively large average trading volume (compared with other similar funds), investors could have used it as a source of liquidity.

It would surprise me if that's the correct answer.

Climate Exchange PLC(CXCHF Quote) is another type of stock that would seem insulated from economic or stock-market cycles.

Regardless of your opinion about the Kyoto Protocol, paying for carbon credits is becoming more important, so volume in carbon credit trading is increasing (there is even an ETF in the works): Trading volume almost doubled in 2007 vs. 2006.