Fund name: Leuthold Global Clean Technology (LGCTX)

Objective: Leuthold Global Clean Tech seeks capital appreciation by investing in stocks from around the world that will benefit from the expected growth in spending and investment in energy efficient and "clean" technologies, innovations and solutions. In addition to investing in individual stocks, the Fund may invest in other cleantech mutual funds, ETFs, closed-end funds and unit investment trusts. The four broad cleantech groups they target are "Alternative Energy," Resource Conservation," "Clean Water," and "Clean Environment." The portfolio is unconstrained by geography, size or style. The managers will select "securities on a company-by-company basis primarily through the use of fundamental analysis." They look at "valuations and growth prospects based on an understanding of their leadership potential, proprietary and technological advantages, financial condition, sales and earnings growth potential, and economic, political and regulatory environment." Typically at least 40% of the portfolio will be invested outside the U.S.

Adviser:. Leuthold Weeden Capital Management (LWCM) of Minneapolis, Minnesota. The firm is a subsidiary of The Leuthold Group which was founded in 1981 to provide "independent, quantitative and contrarian institutional research" for institutions including money managers, hedge funds, pension funds and the like. The strength of Leuthold’s research led them to open a money-management arm in 1987. LWCM now operates eight other mutual funds with net assets around $4 billion, at least one hedge fund and private investment portfolios for folks with two million or more to invest.

Managers: Steven Leuthold and Eric Bjorgen. Mr. Leuthold is the chief investment officer and a managing member of the Adviser. Mr. Leuthold also has been Chairman and portfolio manager of Leuthold & Anderson, Inc. since its organization in August, 1987, a portfolio manager of Leuthold, Weeden & Associates, L.P. since January, 1991 and Chairman of The Leuthold Group since November, 1981. Mr. Bjorgen is Co-Portfolio Manager for five other Leuthold funds, and provides analytical support for the Grizzly Short Fund. He is a member of the investment strategy committee, a key contributor to their monthly flagship publication, Perception for the Professional and author of various special reports.

Leuthold and Bjorgen are assisted by two experienced analysts. David Kurzman has just joined the firm. He spent 12 years as an industry analyst (including time with the Weitz and Needham funds) before founding Kurzman CleanTech Research (to provide focused, independent cleantech research) and Kurzman Capital LLC (to profit from it). I celebrate, especially, his education at a really good small liberal arts college in Iowa. Jun Zhu, with a background in biomed and an MBA, follows new tech and international opportunities. She has been an advisor to the Chinese Academy of Sciences

Management’s Stake in the Fund: None yet. In general, Leuthold’s managers are heavily invested in the firm’s funds. Every manager has at least $100,000 invested in their funds, while Mr. Leuthold has over a million in both Core and Global. In addition, back in February 2009, Mr. Leuthold and Mr. Bjorgen used their own money to fund a limited partnership which mimics this fund.

Opening date: July 22, 2009.

Minimum investment: $10,000 for regular accounts, $1000 for Coverdells and IRAs.

Expense ratio: 1.95% after waivers. Of that, the management and 12(b)1 fees account for 1.25. There’s a 2% redemption fee on shares held fewer than 30 days.

Comments: Investors face two questions. First, why should they invest in cleantech. Second, why should they invest in cleantech through Leuthold. Let’s consider those in turn.

Cleantech refers to all of those technologies which aim to reduce the human impact on the environment, from water filters to windmills to waste reduction technologies. The most obvious driver for such technologies is the deteriorating balance of the global eco-system: worldwide oil production has likely peaked, demand for clean water increasingly outstrips supply, it’s increasingly clear that the global climate is shifting and that population growth will make even "running in place" an iffy proposition. Jeremy Grantham’s July 2009 letter to investors warned that "we are simply running out of everything at a dangerous rate . . . there is now no safety margin. We must prepare ourselves for waves of higher resource prices and periods of shortages unlike anything we have faced outside of wartime conditions." If you assume that we, collectively, sit around like lumps and wait for the apocalypse, then you likely end up with the apocalypse. Former Morgan Stanley strategist Barton Biggs, for example, warns that we must "assume the possibility of a breakdown of the civilized infrastructure."

Fortunately, preventing the collapse of civilization appears rife with opportunities for profit. Leuthold is committed to reaping some of those profits. Dave Kurzman, who Leuthold hired for his wealth of knowledge about investment opportunities in cleantech, was unambiguous about the firm’s intent: "we’re in this to make money, not because we want to make a change in the world." One of Leuthold’s great strengths is their industry-level analysis, and this is an industry that they’ve been following since the 1980s. While the commitment to green technologies has proceeded in fits and starts for decades, they’ve concluded, "this time it’s for real."

Why? Kurzman and manager Eric Bjorgen cited three factors. (1) Corporate managers are facing unremitting pressure for cost containment, which means they need to find ways to conserve on inputs and minimize waste. (2) There’s political will to act, not only in the U.S. (where President Obama promises $150 billion in clean energy investment) but also in China. Mr. Grantham observes that "there’s been a whiff of panic – which I believe is justified – in China’s last five years of behavior regarding resource limitations and possible mitigation through truly dramatic increases in alternatives." While the Chinese government remains uncommitted to CO2 caps, they have committed to tripling its wind and quintupling its solar energy production in a decade. Nature Elements Capital, a Chinese private equity firm, just announced (July 17) plans to raise $350 million for a clean energy venture capital fund. And of four new cleantech IPOs filed in the first quarter of 2009, three were in China. And (3) cleantech is attracting great managerial and technical talent. By Kurzman’s calculation, there’s something like 500 publicly-traded cleantech companies already. Venture capitalists are sinking huge amounts of money into the field, including between $600 million (Ernst & Young) and $1.2 billion (Cleantech Group) in the second quarter of 2009.

The scope of the challenge is such that Leuthold estimates that we might be on the leading edge of a 50-year wave of energy and environmental upgrades.

So, should you ride the wave with Leuthold Global Clean Technology in particular? Good question. Leuthold does some things brilliantly well: asset allocation and industry-level selection among them. This fund proposes to divide the world into four broad industry groups, but it will also allocate resources between 30 sub-industries. They seem modestly less adept at pure stock selection, which is witnessed by the relatively poor performance of their two funds (Undervalued and Unloved, and Select Equities) which focus on individual stocks rather than industry groups. They’ve moved to strengthen their performance by adding Mr. Kurzman and Ms. Zhu; as important, the fund "is generally invested in accordance with the investment strategy of the Leuthold Select Industries fund" which has been a strong-to-superb performer. They anticipate holding something like 50 stocks with a likely "SMID-cap growth" bias. Given Leuthold’s conservatism, they’re understandably anxious to avoid the high risk profiles typical of venture capital funds so they’ll give a lot of weight to a firm’s fundamentals. They also have the ability to institute stop-loss orders to minimize downside.

The alternatives for folks interested in Leuthold Global Clean come in three flavors: too broad, too narrow, and just right.

The "too broad" options encompass most of the available mutual funds. These funds, often with "green" in their names, tend to include two stocks from two types of enterprises: companies whose business practices are sustainable (as when Aunt Millie’s coffee is shade-grown and packaged in recycled paper) and those whose business it is to foster sustainability (as when Aunt Millie sells solar-powered coffee roasters to others). To a greater or lesser extent, the three most prominent "green" funds all dilute the effect that Leuthold seeks by adding stocks from the first category.

The three "too broad" funds include Gabelli SRI Green (SRIGX), which certainly has the most attractive risk/return profile. This two-year-old fund has a tiny asset base, low minimum investment and a very solid record It also employs a series of social screens (no tobacconists here!) and it holds a lot of food and ag stocks (ADM, Cadbury, General Mills, Dr. Pepper) which likely accounts for some of its success in 2008. By far the largest and oldest of the funds is Winslow Green Growth, with about a quarter billion in assets. Like Gabelli, it holds food and ag stocks (Chipotle Mexican Grill, Green Mountain Coffee) as well as other riff-raff (Bankrate, Inc., BioMarin Pharma). Despite its size and tenure, it’s a fundamentally unattractive offering -- quite concentrated (46 stocks, 50% in top 10), quite volatile (a standard deviation of 33% and a beta about 30% higher than the Russell 2000 Growth), with a strong small growth bias. Alger Green (SPEGX) stands out as fundamentally out-of-place with this crowd. Its portfolio is relatively large (90 names), large cap (over 60% of the portfolio is in the large-to-giant range) diverse (only 23% in the top 10), and loaded with consumer product companies (its top five holdings: Apple, Microsoft, Wal-mart, Cisco, IBM). Only one of its top ten holdings – First Solar – is legitimately a cleantech sort of firm.

The "too narrow" options include virtually every exchange-traded fund in the vicinity. The ETF universe includes six alternative energy funds, four for water, two each devoted to nuclear, solar and wind, and one each for "progressive transportation," environmental services and "global warming." While it’s possible that full-time investors might be able to balance and then profitably rotate through these volatile slivers, they seem apt to be toxic for smaller investors’ portfolios.

Bottom Line: Mr. Leuthold dubs this "the most important [investment] theme" he’s seen. He has been way ahead – five to ten years ahead – of the investment pack on a number of issues: on quantitative portfolio construction, the importance of focusing on industry selection rather than stock selection, and the importance of commodity investing among others. One should, as a result, take his judgment very seriously. Folks who once looked at a tech fund for the aggressive growth portion of their portfolio would do well to consider whether they’d be better served with a global fund committed to one of the most dynamic, long-term stories in the investment world.