Noah blackstein, a portfolio manager at Dynamic Mutual Funds Ltd. in Toronto, is increasingly optimistic about the investment prospects in alternative energy resources such as wind, solar and ethanol as the price of a barrel of oil holds above US$50.

“Alternative energy is prime hunting ground for stock-picking, and we’re in the early stages of a secular growth industry,” says Blackstein. “The growth is predicated on a few variables. People are increasingly concerned about the environment. Most of the countries that are major suppliers of traditional oil are politically unstable. There is too much geopolitical risk in regimes such as Iraq, Iran and Venezuela. And the longer the prices of traditional energy stay high, the more financial sense the new technologies make.”

Companies investing in alternative energies are finding their way into different kinds of investment pools, including income trusts, private investment pools, energy funds, socially responsible funds and regular mutual funds with broad mandates, including Dynamic Power American Growth Fund and Dynamic Power Global Growth Fund, overseen by Blackstein.

His holdings include St. Louis-based Monsanto Co., a biotechnology company that has a developed a seed for growing a high-starch corn useful in producing ethanol. He also likes Suzlon Energy Ltd., a fast-growing, India-based wind-park developer that is one of the world’s leading and lowest-cost manufacturers of wind turbines.

“I look for revenue and earnings, not prospect stocks,” says Blackstein.

Hot prospects in alternative energy companies that ran out of steam have created disappointments for investors during the past few years. Alternative energy stocks such as hydrogen-powered fuel-cell developer Ballard Power Systems Inc. took off during the technology stock craze of 1999 and 2000, but many didn’t live up to expectations. Sentry Select Capital Corp. , which introduced Sentry Select Alternative Energy Fund in November 2000, ended that fund’s life about two years ago because of a lack of investor interest.

“It was hard to find suitable investments and long-term viable projects,” says Glenn MacNeill, Sentry Select’s vice president of investments and manager of Sentry Canadian Energy Growth Fund. “Some alternative energy sources are highly touted, such as ethanol and hydrogen, but they are extremely expensive relative to traditional petroleum products, and most don’t make financial sense at this stage.”

Outside of traditional oil and gas, his fund has invested in wind power in the past, and currently has some positions in coal and uranium, which have a proven market in electricity generation. Newer technologies, such as exhaust scrubbers, make burning coal much cleaner, and uranium is a source of fuel for nuclear reactors. In the coal arena, his holdings include Fording Coal Ltd. and Western Canadian Coal Corp. On the uranium side, he holds Cameco Corp., UEX Corp. and Uranium City Resources Inc.

MacNeill views wind as a viable source of power, but he is staying away from fuel-cell technology companies such as Ballard, which have a “high burn rate.”

“There is not yet a cost-efficient alternative to fossil fuels on the transportation side, and that is where North America burns most of its energy,” MacNeill says. “Experimental companies spending a lot of money on developing technologies with little likelihood of payoff in the short term have a high burn rate.”

Wind power is the fastest-growing alternative energy, and has attracted a lot of private investment as well as significant interest from a handful of income trusts, including Creststreet Power & Income Fund and Clean Power Income Fund.

Although Canada currently sources less than 1% of its total energy from wind, it has the potential to source more than 20%, says the Canadian Wind Energy Association. The country now produces enough wind energy to support the power needs of 240,000 homes, but there is the potential to provide electricity to millions more, the association says.

Canada’s capacity in wind generation grew by 54% in 2005, shattering the previous annual growth record, and 2006 could see almost double the rate of last year’s expansion, the CWEA forecasts. Wind is pollution-free, renewable and abundant. Canada is the 14th largest producer of wind energy in the world, but still remains far behind global leaders such as Germany, Spain, the U.S. and India, as well as small countries such as Denmark, the Netherlands, Portugal and Austria.

“Renewable energy such as wind is one of the brightest sectors of power generation, and can be produced by a power facility at about half the cost of solar power,” says Stephen Probyn, president of Clean Power Income Fund.

@page_break@That fund is invested in four environmentally sensitive power-generation technologies, including hydro, wind, biomass (wood waste) and landfill gas recovery, and is the first income fund to be certified under Canada’s Environmental Choice program. The fund also has holdings in seven wind projects, including the Erie Shores Wind Farm now under construction along a 29-kilometre strip of Lake Erie shoreline in southern Ontario. The farm has a 20-year supply contract with the Ontario Power Authority.

The fund is also involved in two large projects — in Chapais, Que., and Whitecourt, Alta. — that convert forestry waste such as bark and wood chips into energy. Clean Power Income Fund says all of its 44 projects combined are currently responsible for offsetting carbon dioxide-equivalent greenhouse gas emissions by about six million tonnes.

Other income trusts participating in various forms of alternative energy include Great Lakes Hydro Income Fund, Algonquin Power Income Fund, Boralex Power Income Fund, Countryside Power Income Fund, Innergex Power Income Fund, Northland Power Income Fund and TransCanada Power LP. The income trusts trade on the Toronto Stock Exchange and account for about $4 billion of assets, says the Toronto-based Social Investment Organization.

For investors who can afford a $150,000 minimum investment, Toronto-based Investeco Capital Corp. runs two funds that provide expansion capital to private companies in four areas: alternative power, water technologies, organic and natural foods, and pollution prevention. The funds are able to offer some flow-through write-offs to investors looking to reduce their income taxes, including Canadian renewable and conservation expenses.

Socially responsible investment funds also have a keen interest in alternative energy investments. Meritas Jantzi Social Index Fund, for example, tracks the Jantzi social index, a Canadian-based index that includes companies screened for SRI and environmental standards. The index contains ATS Automation Tooling Systems Inc., which is under some pressure from shareholders to hive off its solar-panel manufacturing business into a separate public company. The index also holds Suncor Energy Inc., which is funding initiatives in future technologies such as wind and biomass energy, and TransAlta Corp., which has interests in clean coal power.

“There is a huge amount of grassroots interest in sustainable, responsible investing, and alternative energies fall into that category,” says Michael Jantzi, president of Toronto-based Michael Jantzi Research Associates Inc. and creator of the Jantzi index. “Companies need to have a product on the ground and running before they can be profitable, and the question they face is how far ahead of the curve they want to be. Getting humans to change behaviour may require sustained high energy prices or some shock to the system.”

Acuity Investment Management Ltd. of Toronto offers three Clean Environment funds, which focus on water, energy and waste-management technologies, as well as two Social Values funds, which have broader “responsible investing” mandates.

Martin Grosskopf, Acuity’s associate portfolio manager and manager of sustainability research, says he seeks companies that are already making money, but he expects the earnings stream to be “bumpy” in new technologies.

Vancouver-based Inhanced Investment Management Inc. runs the Inhanced family of SRI funds (formerly the Real Assets family).

“We are looking for intelligent and sustainable ways to play the energy market,” says Dermot Foley, vice president, strategic analysis. “With the decreasing supply of traditional fossil fuels and political instability around oil supplies in the Middle East, alternative energy can be a staple source of supply.”

Business Engineering Science and Technology Fund, a labour-sponsored investment fund with a keen interest in clean energy, has a significant investment in Iogen Corp., an Ottawa-based biotech firm that produces cellulose ethanol. The ethanol is produced from waste that comes from the agricultural process of husking corn and wheat.

With the Ontario government requiring automobile fuel to contain 10% ethanol by 2007, Iogen’s plants will have a market, says John Richardson, chief executive officer of Ottawa-based B.E.S.T. Capital Management Ltd. IE