High risk green energy drives Wall Street's top-performing fund

By David Randall

NEW YORK (Reuters) - Kevin Landis is the manager of this year's best performing investment fund on Wall St. but investors may want to think twice before copying his stock picks.

Landis, the portfolio manager of the tiny $6.7 million Firsthand Alternative Energy fund , has posted a return of 79.6 percent for the year through October 7, the best performance of any actively-managed stock fund in the United States that doesn't use leverage, according to Lipper.

His very good year follows one of his worst. Landis closed out 2012 with a decline of 23.5 percent, one of the poorest performances among his Morningstar category and nearly 40 percentage points less than the MSCI World index. The roughly 100 percentage point swing in performance between 2012 and 2013 is the largest for any U.S. mutual fund over that time, according to Lipper.

Landis' green energy bets, especially on the solar industry, could remain volatile.

After years of oversupply cut into profits and sent shares tumbling, solar companies have rebounded this year in part because of long-standing subsidies and rebates to residential customers in the United States.

These tax credits and other incentives were initially offered when the cost of solar power was higher. Utility companies are lobbying for them to be dropped or reduced on grounds they have become too generous. Such moves would hurt solar companies if adopted.

With rooftop solar installations rising, the total output of solar power in the U.S. is expected to rise 20 percent this year, according to GTM Research. The country will become the fifth-largest supplier of solar power worldwide by 2018, according to market forecaster NPD Solarbuzz.

As a result, companies like SolarCity Corp - which makes up about 14 percent of Landis's portfolio - have seen their shares jump 215 percent for the year to date. SunPower Corp, which makes up about 4 percent of his portfolio, is up nearly 410 percent since January, while SunEdison Inc is up approximately 177 percent.

Those outsized gains make fund analysts wary.

"You can't argue with its recent track record, but the fund's volatility is worth paying attention to. Alternative energy has history of being a market where everything is going very well or very, very poorly," said Todd Rosenbluth, director of mutual fund research at S&P Capital IQ.

Landis, for his part, said that he has shifted his strategy for solar companies, which make up approximately a third of his assets, away from Chinese manufacturers and toward more stable U.S. service providers.

"People who felt they had the vision to see where the world was headed - I'll include myself in that list - learned the hard way that just buying the solar panel makers and figuring 'Surely they must eventually get their costs down' was not a very successful investment strategy," Landis said.

A better investment strategy has been to focus on companies like Solar City that take advantage of lower costs without having to lose money selling and making panels, he said.

Even with the large gains for the year, Landis has been holding on to his top-performing solar positions. Analysts, however, have been more wary. Six of the seven analysts polled by Reuters who cover SolarCity, for instance, have a 'hold' rating on the stock, with the remaining analyst rating the company a 'sell.'

Landis says that solar companies may remain volatile over the next five years even as they expand their market size.

"This may turn into the TV business, where there are lots of revenues but from time to time it's unprofitable," he said, referring to the occasional gluts of production in that industry that squeeze retailers and manufacturers. "Still, when you take a look at our home utility bill, the rates that you are paying only go up and the price of solar only goes down. I think we're now at the point where people can make money with a sensible business approach," he said.

Landis, who co-founded San Jose, California based Firsthand Capital Management in 1993, is better known in the fund industry for his investments in technology. His $74.6 million Firsthand Technology Opportunities fund, for instance, has returned an annualized 20.7 percent over the last five years, putting it in the top 17 percent in its category, and his firm has made early-stage investments in companies such as Twitter.

Along with his bet on solar servicers, Landis's alternative energy fund also benefited by a very well timed bet on electric car company Tesla Motors. He began buying shares in April when it traded at around $40, and sold the position in late August after its shares topped $160, enough for a 300 percent gain. Tesla closed at $183.07 on October 7, giving the company a 440 percent rally for the year.

"We weren't serious investors in the stock. We made our money and we were out," Landis said.

In order to diversify his portfolio, Landis has also expanded his definition of what he considers an alternative energy stock. His second-largest position is in glass maker Corning Inc, for instance, because the company has been expanding into the polycrystalline silicon market, which is the key raw material used in most solar cells.

He has also been buying shares of industrial company 3M Co and auto parts supplier Johnson Controls Inc that have been developing products for the so-called smart grid, the term for modern electricity infrastructure that emphasizes automation and efficiency.

Investors who want to follow Landis's lead will have to pay for it. The fund charges an annual fee of $1.98 per $100 invested, an expense ratio that Morningstar considers high.

(Reporting by David Randall; editing by Andrew Hay)