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Where to put your money

The more narrowly you zoom in on the market, the more volatility you are likely to experience

BY GAVIN ADAMSON

Investors interested in an up-and-coming green financial product can look forward to the launch of Canada’s first carbon trading company within the next 12 months.

Carbon Capital Management, based in Toronto, owns an operating company that will invest in green-technology businesses and projects in exchange for carbon credits that can be sold in domestic and global cap-and-trade regimes.

“If there’s no carbon stream, we don’t invest,” explains Carbon Capital’s director, Dave Rogers.

“We will do private placements over the next two months in that public vehicle,” said Mr. Rogers, who has been scouring the market for investment ideas for the carbon trading company. “And then there will be an [initial public offering] available to institutional and retail investors.”

As with the profusion of organic foods and consumer products, an increasing number of green investment ideas are sprouting up – although financial professionals agree that there aren’t yet quite enough ideas to satisfy an entire portfolio. “But there are some pieces of the puzzle you can fit with green and [socially responsible investing],” says Adrian Mastracci, a portfolio manager and president of KCM Wealth Management in Vancouver.

Portfolio managers like Mr. Mastracci describe a few basic strategies for investors of all types who might be looking for riskier small-cap growth investments, baskets of blue-chip companies, or even more blue-sky investment ideas such as carbon trading.

Investors will notice a few common themes, says Duncan Stewart, chief investment officer of Duncan Stewart Asset Management Inc., which specializes in tech investments. These include clean technology, clean energy, socially responsible investments and water-related investments.

Investing in individual stocks in the clean technology theme is an option, but, as always, advisers steer retail investors toward diversification. Even if you believe wholeheartedly in the future of solar power, there are no guaranteed safe investments in this relatively new industry.

“Doing it one stock at a time is certainly something you can do with your fun money, but it’s certainly closer to gambling than investing,” says Mr. Stewart, who is based in Toronto. “This is the high-growth, high-return area – and it is also the riskier area.”

To illustrate the challenge, he notes that two promising small-cap Canadian companies in the clean technology industry made their debut on the Toronto Stock Exchange in the past year. One, 5N Plus Inc., a producer of metal compounds for solar panel construction, debuted last December at $3.90 and has traded as high as $13. Day 4 Energy Inc., which develops photovoltaic technology for use in solar panels, on the other hand, opened at $7.20 and has traded below $4. “As a retail investor, you’d never have known which was which,” Mr. Stewart says.

If you’re set on individual stocks, clean energy and water themes can also include some long-established companies that could fit into any large-cap portfolio, he adds. Veolia Environment AG, the French water infrastructure business, or BG Group PLC, the British natural gas distributor, are among names in this area.

“Some of them are utilities,” notes Mr. Stewart, referring to the companies’ moderate earnings growth. “For some people, that’s what they’re looking for.”

The broadest, lowest-risk green strategy involves so-called socially responsible investments (SRI), which include environmental performance among a number of other screening factors, such as a company’s human rights record or its corporate governance performance.

Generally, SRI will screen companies in each major industry – including banking, mining, and oil and gas – and rank them in an index of best practices. Toronto-based Jantzi Research Inc., a third-party firm that oversees SRI investing for RBC Mutual Funds Inc., also screens for companies that develop nuclear energy. In this way, SRI may suit some investors, but others may find the strategy at cross-purposes to their tastes and investment goals.

“It depends on what you want. Investors really need to be knowledgeable about what the different SRI or green funds screen for [and] what they don’t,” says Dan Hallett, president of the research firm Dan Hallett & Associates in Windsor, Ont.

Although an investor may reduce volatility with a diversified basket of blue-chip SRIs, the tradeoff may be a paler shade of green, so to speak, and less exposure to smaller-cap companies involved directly in a greener future.

There is a middle ground, perhaps. Scott Stewart, an investment adviser with ScotiaMcLeod Inc., says that when clients ask him about green investments, he steers them toward ETFs that invest in baskets of companies directly related to clean technology. “Most of the companies are poorly followed or not very liquid,” Mr. Stewart says. That can lead to wild volatility from stock to stock. “The diversification becomes more important to me.”

One caveat to keep in mind: While broadly based SRI funds could potentially constitute an entire investment portfolio, for more finely tuned mandates investors will likely want to limit total exposure in all these specialized funds to less than 10 per cent of their portfolio, Mr. Hallett says.

“The more narrowly you zoom in on the market, the more volatility you are likely to experience,” he says. “And volatility isn’t inherently bad except that it tends to induce investors into making poor decisions that detract from performance.”

Special to The Globe and Mail

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