Last week, during the Green Business Works Expo in Atlanta, we were able to sit down with John M. Segrich, co-manager of the Gabelli SRI Green Fund to discuss his investment thoughts. This unique equity mutual fund is focused on (to quote the fund's fact sheet) "sustainability issues it believes materially impact the world we live in through a series of economic, social, and political changes, including, but not limited to: climate change, energy security and independence, natural resource shortages, organic living, and urbanization." It's quite a mouthful, but in practice it makes sense.
Gabelli is a research-driven firm whose investment philosophy is to "identify companies that are selling at substantial discounts to their intrinsic value" (i.e., the value that an informed buyer would pay for the entire firm.) This research-driven approach lends itself well to assessing both the valuation and the sustainability issues inherent in each potential investment.
The firm's approach appears to be working. Mutual fund rating service Morningstar recently awarded its highest rating (5-Stars) to the three year old fund. Classified as a Mid Cap Growth fund, Gabelli SRI Green holds more than half of its investments outside the US. As such, its largest holdings are hardly household names -- and they tend to change frequently. (The fund's portfolio "turnover" was in excess of 190 percent last year.) Its largest holding is ReneSola Ltd., a China-based manufacturer of silicon solar wafers (the raw materials for photovoltaic solar panels), which comprised some 7% of the portfolio at the end of the third quarter. In the prior quarter, the largest spot was occupied by Rubicon Technologies, an Illinois-based maker of sapphire crystal products for LED and other optics applications. Most of the fund's 60-odd holdings are equally obscure names that few investors would recognize.
Whether purposefully or not, the fund balances the risk of volatile mid-cap tech firms with at least a few larger, more established companies. Pharmaceutical firm Novo Nordisk fits the firm's "change" criteria with its focus on medications to combat diabetes, a disease that the managers expect to become more prevalent as emerging nations become wealthier and more sedentary. Johnson Controls is another large firm ($20+ billion market cap) whose building efficiency and power solutions groups are clear fits with any clean tech theme. As we said, these large cap firms are the exceptions in a portfolio dominated by smaller niche companies.
We have spent the bulk of this report describing the fund's focus on interesting, world-changing companies. Another aspect of its management is the disipline around where it will NOT invest. The fund's "social" criteria excludes many controversial industries such as tobacco, alcohol, and gambling while also avoiding the top 50 defense contractors. Environmental factors are addressed through the active investment criteria that specifically target these industries. This is evident even in the manner in which the fund describes its top industry sectors. Rather than use broad terms such as "Technology" or "Energy", the managers identify very specific industries, such as: "Light Emitting Diodes", "Solar" or "Energy Efficiency" as having large allocations within the fund.
With its short track record (just three years), high turnover, concentrated investment style and focus on small, volatile companies, the Gabelli SRI Green Fund can hardly be considered appropriate as a core holding in any investment plan. However, in a supporting role, Gabelli Green could be a very interesting, and potentially exciting, alternative for sustainably-minded investors.
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