March1,2021 BARRON’S 31
how many people relied on solar cells to
power the meters and other devices on
their sailboats. When the two read up on
the climate change threat, they concluded
that solar power had a strong future. It was
1982, however, and the Securities and Ex-
change Commission disagreed, saying the
fund’s original name—the Solar Fund—was
too focused on one sector. “They didn’t re-
alize climate change was a thing,” Schoen-
wald says. So New Alternatives it was.
Today, solar “is not alternative any-
more,” Schoenwald says. In fact, it is so
mainstream that the fund doesn’t invest
much in solar-cell manufacturers. The
business has become too competitive, he
says, citing the supply of cheap solar cells
from China.
Instead, the two favor yield companies,
or yieldcos, which generate electricity using
renewable energy and pay out most of their
cash flow as dividends.Brookfield Re-
newable Partners(BEP) is one example.
Rosenblith says that, in the past decade,
they have realized “the companies that are
going to be the strongest are the end-prod-
uct users and developers, the ones buying
the wind turbines and solar panels and
constructing and operating the generating
facilities.” Schoenwald likes that these com-
panies have “physical assets” in their gen-
eration plants that have a tangible value
and produce income. As of Dec. 31, some
66% of the fund’s portfolio was in “renew-
able-energy power producers and develop-
ers,” most of which were yieldcos.
New Alternatives
Total Return
1-Yr 5-Yr 15-Yr
NALFX 43.2% 23.3% 9.2%
World Small/Mid
33.5 16.8 8.0
Stock CategoryTop 10 Holdings
Company / Ticker Weighting
Brookfield Renewable
Class A / BEPC
6.1%
Hannon Armstrong Sustainable
Infrastructure Capital / HASI
5.6
EDP Renovaveis / EDPR.Portugal 5.2
Orsted / ORSTED.Denmark 5.0
NextEra Energy Partners / NEP 4.7
ENEL /ENEL.Italy 4.5
Iberdrola / IBE.Spain 4.4
Vestas Wind Systems /
VWS.Denmark
4.1
TransAlta Renewables /
RNW.Canada
4.1
Siemens Gamesa Renewable
Energy / SGRE.Spain 4.0
Total: 47.7%
Note: Holdings as of Dec. 31. Returns through Feb. 22;
five- and 15-year returns are annualized.
Sources: Morningstar; New Alternativethemes. All together, the suite has $558
million in assets; year-to-date, they’re up
3.3% on average.
Its disruption funds employ a new,
time-based fee model. Annual fees start at
1%, fall to 0.75% after one year, and 0.5%
after another two years. “The overall objec-
tive is to incentivize investors for long-
term investing,” says Chris Peixotto, vice
president of Fidelity’s investment product
group. This makes particular sense for
disruptive funds, which can be volatile and
take years to play out.
The $421 millionGoldman Sachs In-
novate EquityETF (GINN), launched in
November, tracks anindex of nearly 500
stocks—about 10 times more than ARK
Innovation. That lack of concentration,
and lack of active management, makes this
ETF look a lot more like the broad market,
with top holdings such asAlphabet
(GOOG),Nvidia(NVDA), andFacebook
(FB), none of which are in the ARK Inno-
vation ETF. The Goldman Innovate ETF
has returned 4.8% so far this year.
The $181 millionDirexion Moonshot
InnovatorsETF (MOON), also launched
in November, is probably the most ARK-
like fund. It holds just 50 stocks, but unlike
most of ARK’s ETFs, it is not actively man-
aged. Instead, it tracks anindex that uses
natural-language processing to review
company filings, identify innovation-re-
lated remarks, and selects early-stage dis-
ruptive firms. The fund is up 34% this year.
The $1.1 billionInvesco NASDAQ Next
Gen 100ETF (QQQJ), a mid-cap version
of the popularInvesco QQQ Trust
(QQQ), was a big hit when it launched in
October. It tracks the101st to the 200th-
largest Nasdaq-listed “up-and-coming”
companies, mostly in tech and other inno-
vation-driven industries. Many of today’s
mega names were once in the Next Gen
basket. The fund is up 7.1% this year.
All these innovation funds have fallen in
the past week, but none have seen the kind
of outflows ARK did. Perhaps being the
first mover isn’t always an advantage.B
That gives New Alternatives some
characteristics similar to yield-driven util-
ity funds, which it has also beaten hand-
ily, delivering a 12.9% 10-year annualized
return versus the average utility fund’s
9.4%. (The fund paid a 4.6% yield in the
past 12 months.) Yet like utilities, it has a
common risk factor—interest rates.
Yieldcos are sensitive to interest rates
because they pay out their profits, and
must borrow to invest in new renewable-
energy projects. “We’re always looking
over our shoulder at interest rates, to see
how these companies are preparing them-
selves for the day when money is not so
cheap,” Rosenblith says.
The duo like Brookfield “because they
have really deep pockets and have used
their assets in a smart manner,” Rosen-
blith says. Part of Brookfield’s manage-
ment smarts includes looking at bankrupt
paper mills that had hydroelectric assets
in their operations and buying “the hydro,
but not the paper part” of the business at
liquidation prices, Schoenwald adds.
Last year, Brookfield bought out the
remainder of solar and wind giant Terra-
Form Power, after first investing in its
bankruptcy workout in 2017. That created
the subsidiary Brookfield Renewable Cor-
poration (BEPC), which is structured as a
traditional corporation. The fund had
held TerraForm, giving it a 10% allocation
overall to Brookfield. “We have to sell
stuff occasionally, because a stock gets too
large in the portfolio, but we really resist
the idea of selling those companies that
are doing the best,” Rosenblith says.
While yieldcos dominate the portfolio,
there are some alternative-energy manu-
facturing sectors where the competition
isn’t as cutthroat as solar cells. “There are
maybe six or seven companies, total, that
comprise the vast majority of wind tur-
bine manufacturing,” Rosenblith says. So
the fund owns Denmark’sVestas Wind
Systems(VWS.Denmark) and Spain’s
Siemens Gamesa Renewable Energy
(SGRE.Spain), two of the world’s domi-
nant turbine manufacturers.
Schoenwald and Rosenblith also con-
sider social and governance factors before
buying or selling a stock. They sold out of
electric-car makerTesla(TSLA) in 2019,
partly because of allegations that it was
discriminating against workers seeking to
form a union. Tesla continues to object to
claims by the National Labor Relations
Board, saying that it is antiunion.
All of which is to say don’t invest in
New Alternatives if you are looking for a
world small/mid stock fund. Buy it be-
cause you believe in the future of alter-
native energy and share its managers’
values.B
FUNDS
Hot ETFs Beget Hot
Money—and More ETFs
R
ed-hot exchange-traded funds
from ARK Invest suffered a ma-
jor setback this week.
In its worst week since last
March, the firm’s flagship product, the $24
billionARK Innovationexchange-traded
fund (ticker: ARKK) tumbled 14.6%, as
some of its top holdings—includingTesla
(TSLA) andRoku(ROKU)—fell sharply.
The S&P 500, meanwhile, fell 2.4%.
An improving economic outlook—
which could lead to higher prices and
higher interest rates—sent stocks lower
this week, especially those of the highest-
flying technology companies. At its peak
on Feb. 12, ARK Innovation was up 26%
for 2021, versus the S&P’s 5%. By the end
of the month, ARK Innovation was up
4.7% and the S&P was up 1.5%. Investors
yanked more than $1 billion out of ARK
ETFs on Wednesday and Thursday, the
largest net outflows in the firm’s seven-
year history, and a sharp reversal from
weeks prior. The funds have seen $16 bil-
lion in inflows so far this year.
As the Wall Street adage goes, when the
ducks are quacking, feed the ducks. Fund
companies took note of ARK’s inflows, and
have been rolling out similarly specialized,
ARK-like funds that focus on innovative
and disruptive companies.
Cathie Wood, the economist who
founded ARK Investment Management, is a
thoughtful observer and excellent stock-
picker. But ARK’s phenomenal rise is due to
more than skill: Five of ARK’s seven ETFs
returned more than 100% last year, an his-
torical anomaly. Returns like this attract hot
money from folks who rush into a “sure
thing,” and sell as soon as shares falter—
hence the $1 billion in outflows in two days.
Fidelity rolled out a suite of six actively
managed disruption funds last April. Five
are focused on specific areas such as auto-
mation, communications, finance, medi-
cine, and technology; one,Fidelity Dis-
ruptors(FGDFX), encompasses all five
By Evie Liu