Alternative Energy Fuels One of Quarter's Top-Performing Funds

See Also
Third-Quarter Fund Roundup: Value's Tortoise Cruises by Tech's Hare
Third-Quarter Fund Roundup: The Big 10 Failed to Post Big Numbers

One of the top performing funds of the third quarter owes more to Ralph Nader than it does to Warren Buffett.

The (NALFX)New Alternatives fund, which invests only in clean-environment companies involved in such industries as alternative energy, recycling and natural foods, has had an impressive track record this year. It is ranked No. 2 among all funds for the third quarter, with a 32% return. And its 74% year-to-date return ranks among the top 15 funds, according to Lipper.

But the fund's father-and-son management team of Maurice and David Schoenwald don't want investors who are just looking for performance -- they're more interested in attracting true believers.

"We want the people who are environmentalists, not the ones who, if we don't stay up 70% every year, are going to run away," says Maurice Schoenwald, the fund's 80-year old founder and co-manager.

Judging from the 18-year-old fund's modest $60 million in assets, the Schoenwalds have been getting their wish. Indeed, most years have not been as good as this one for New Alternatives. Last year, it returned 8.5%, underperforming the S&P 500 index by 12.6 percentage points, according to Morningstar. The previous year was even worse -- the fund lost 10%, underperforming the S&P 500 by almost 39 points.

A Decade of New Alternatives

Data through August 2000 Source: Morningstar

The fund's co-managers take that track record in stride, acknowledging that the type of companies they invest in are not always going to be hot. Among the portfolio's big gainers this year is FuelCell Energy (FCEL), maker of a proprietary fuel cell system that has attracted interest from major energy-producing companies. The stock is up 668% this year. Another is SatCon Technology (SATC), maker of electro-mechanical equipment for a wide variety of industries. It's up 328%.

The rising cost of oil this year has boosted the performance of alternative energy stocks like these, and analysts say some of those companies' share prices may be getting overvalued. But the Schoenwalds think the rapid rise of oil prices only partially explains the stocks' performances.

"We'd like to think that these stocks are doing well because of their product rather than the high energy prices," says David Schoenwald.

Sector Remains Speculative

Despite a renewed interest in alternative energy, analysts say that the technologies have been slow to catch on, and many of the companies in the sector remain speculative investments. FuelCell Energy, for example, posted a net loss of $1.3 million or 17 cents per diluted share for the quarter ended July 31, compared with a net loss of $386,000, or six cents a share, for the same quarter the previous year.

But Maurice Schoenwald is confident that FuelCell Energy, which produces energy through an electrochemical reaction combining fuel and air instead of combustion, will be one of the major players in the industry. The company recently announced a distribution agreement with power company PPL (PPL) and said Monday that Enron (ENE) subsidiary Enron North America would invest $5 million in FuelCell's common stock and would work with the company to develop and market its fuel cell products.

"Many of the fuel cell companies will go down the tubes," acknowledges Maurice Schoenwald. "We only have to try very hard to decide which ones are going to survive."

Investing in viable sources of alternative energy has been a preoccupation with Maurice Schoenwald since the early 1970s. A lawyer by profession, Schoenwald first got the idea for the fund after seeing an advertisement for photocell energy at a boat show. The U.S. was in the midst of an oil crisis, and Schoenwald thought that developing alternative energy sources would be key to decreasing U.S. dependence on foreign oil.

Schoenwald then decided to draw up a prospectus for a fund called the Solar Fund that invested in alternative technologies, but it sat in his filing cabinet for years while he continued to practice law. Then in 1982, when Maurice asked his son David, also a lawyer, to join his practice, David proposed that the two start up the fund instead.

With the help of contributions from friends and neighbors, the Schoenwalds were able to raise the requisite $100,000 needed to start the fund. After about four or five years, the New Alternatives fund had roughly $1 million in assets. The fund is sold primarily through brokers and comes with a front-end 4.75% sales charge. Annual expenses are 1.13%.

Beyond Energy

At first, New Alternatives only invested in alternative energy companies, but the co-managers later broadened their mandate to include things like natural food manufacturers because they couldn't find enough energy companies to invest in.

Today, the fund is run out of a three-person office in Melville, N.Y., with the fund managers aided only by a secretary. While father and son are actively involved in managing its investments, the elder Schoenwald says his 51-year-old son does most of the day-to-day running of the fund.

"David is the most active because I'm old and weary and he's smart and remembers things," jokes the octogenarian, who credits his health to daily naps, tennis three times a week, boating twice a week and climbing the stairs two at a time.

Whether the fund will continue its hot performance this year remains to be seen, but both managers remain committed to their cause and continue to look for companies that are on the cutting edge of alternative energy. Maurice Schoenwald says ocean energy is the next energy source he'd like to invest in, but he's having trouble finding U.S. companies that are developing the technology.

"We were looking at fuel cells 20 years ago. There are new technologies that we can't find to invest in, but I express some personal confidence that they're coming," he says.

>To order reprints of this article, click here: Reprints