They say the first step to breaking an addiction is admitting you have a problem. If that's the case, then President Bush made some strides in breaking the nation's dependence on oil by promoting alternative fuel sources last week in his State of the Union address. But Matt Patsky, portfolio manager for the
Winslow Green Growth
fund (WGGFX), is way ahead of him.
Patsky has been searching for promising alternative energy companies since he joined the fund in 2003. Nearly a quarter of his fund is now composed of solar, clean-burning coal and other environmentally friendly energy sources, which he says are the best long-term solutions to the current energy crisis. His "green"-based strategy has made his shareholders a lot of green as well. The small-cap growth fund is up 10.5% year to date and has a 41% average annual return for the past three years.
sat down with Patsky to get his views on how the U.S. can go cold turkey from Mid-East oil, as well as discover his favorite alternative energy companies.
In his State of the Union speech, the president talked about breaking away from our country's "addiction to oil." What is your view of the current state of U.S. energy consumption?
In the near term, we need to focus not on alternative fuels but on reducing usage. More energy-efficient cars, lights and appliances. There has been little focus in the U.S. on conservation. This is a large near-term opportunity.
In the longer run, we must develop safe and secure sources of energy. This requires the acceleration of development of renewable energy sources like wind, solar and geothermal.
What percentage of your portfolio is composed of alternative fuel sources? Is it tough to find good companies? It seems like a niche area filled with mostly small-cap companies.
Twenty percent of our fund is invested in cleaner energy or renewable energy stocks. Yes, it is tough to find good companies. Most of the pure plays are small-cap companies. Many of the biggest players are parts of larger conglomerates like
Which alternative energy stocks do you like?
, which is a technology company engaged in the air-pollution control and specialty chemical businesses through Fuel Tech Inc., its wholly owned subsidiary. FTI's focus is the marketing of its nitrogen oxide reduction and "fuel chem" processes. To put in more simple terms, Fuel-Tech is focused on two products: one which reduces emissions from coal, the other improves the efficiency of coal-fired furnaces. This company continues to benefit from the move toward using more "clean" coal technologies. We believe the stock will continue to trend higher over the balance of 2006.
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Another company we own is
. They are an electricity solutions company engaged in the development and manufacture of products for improving the cost, efficiency and reliability of systems that generate, deliver and use electric power. We believe this is an excellent way to play the need to upgrade both the reliability and efficiency of the current electric grid in the United States.
When it comes to solar power we like
, which is a company that develops, manufactures and markets solar power products enabled by its String Ribbon technology that provides reliable and environmentally clean electric power throughout the world.
We also like a German company called
, which concentrates on the production of high-efficiency solar cells. Evergreen and Q-Cells have partnered on a production facility in Germany through a joint venture. We believe that both companies provide an excellent way to play continued growth in global demand for solar cells.
Alternative energy stocks tend to rise during geopolitical crisis periods -- like Middle East wars -- only to be forgotten about when oil prices drop. Why should this time be any different?
The difference is that this time China and India are rapidly soaking up any excess supplies of fossil fuels.
From your "green perspective," where do you think oil prices will go? Are traditional energy companies overvalued? Are there any you would invest in, were it not for your green stockpicking mandate?
Near term -- $50 -- I believe the market is currently overextended. In the long term I see it moving up over $100 as the price moves up to a level to bring demand in line with supplies. We would view energy stocks broadly as overvalued in the current market.
We can invest in companies which are "best in class" in terms of environmental practices. Therefore, we could make a case for BP, Shell or some of the natural gas companies. That said, we are focused on small-cap and have not found any "best in class" plays that are under $2 billion in market cap among the traditional energy companies.
Despite your mandate to buy only green companies, your fund has performed exceptionally well. Is this proof that investors can be environmentally friendly and still make money?
Over the past 10 years, Winslow Management has delivered returns of approximately 20% per year vs. its benchmark, the Russell 2000 Growth return of 5%. This performance places Winslow Management among the top 1% of all small-cap growth managers.
Integrating a review of a company's environmental and governance practices into our analysis has helped improve our returns. It has been our experience that management teams that have taken the time and effort to minimize their environmental impact tend to be more thoughtful better managers in general. Over time, better-managed companies outperform and deliver higher shareholder returns.