Why a renewable fund failed amid the ESG boom

It was a moment that should have been a win for both environmentalists and sustainable-minded investors: a fossil fuel investment vehicle named for the late oil tycoon T. Boone Pickens was transforming into a renewables fund to take advantage of interest in the energy transition.

Just five months after the fund was rebranded, however, it was liquidated.

It may seem unusual that a product focused on renewable energy was unable to attract buyers at a time when Wall Street is clamoring over sustainable investing. Environmental, social and governance and values-based exchange-traded funds surged in 2019, with assets under management reaching $94 billion globally, double the level in 2018, according to data compiled by Bloomberg Intelligence.

Even with the growth, smaller providers are finding it tough to compete when the lion’s share of new investment is flowing to the world’s biggest managers that charge the lowest fees, like BlackRock Inc. and Vanguard Group. That’s underscoring a wider concern within the investing community that a race to the bottom in fees is distorting even the most attractive of opportunities.

“I’ve seen big names get humbled in the ETF world,” said Bloomberg Intelligence analyst Eric Balchunas. “It is absolutely brutal.”

BP Capital Fund Advisors, a spinoff of Mr. Pickens’s shuttered hedge fund, is the latest victim. The firm threw in the towel on its Pickens Morningstar Renewable Energy Response ETF, citing the fund’s prospects for growth. The fund’s fees also were five times higher than those charged by rival offerings from BlackRock and Vanguard. The ticker symbol of the Pickens Morningstar ETF was RENW and it was billed as a way to give investors exposure to companies that use, rather than produce, renewable energy. RENW had its last day of trading at the end of January.

“We were correct that people cared about the topic,” Toby Loftin, founder of BP Capital Fund Advisors, said. “This has a whole less to do with renewable energy,” and more to do with whether smaller U.S. asset managers can launch new products and “actually be successful,” he said.

'Pickens Plan'

Mr. Pickens rose to fame as a corporate raider in the 1970s and 1980s, using his Mesa Petroleum Co. to attempt takeovers, including a failed bid for Gulf Oil that ended with Gulf Oil being sold to Standard Oil Co., in what was the largest merger in history at the time. But it was Mr. Pickens' bets in the energy futures market after turning 75 that earned him much of his wealth.

Mr. Loftin joined Mr. Pickens' hedge fund in 2010 after years of working externally as an energy research specialist. In 2013, he started BP Capital Fund Advisors with Mr. Pickens’ support. Mr. Pickens shuttered the hedge fund five years later.

Despite his career in oil and gas, Mr. Pickens was a vocal supporter of renewable energy. His "Pickens Plan," which he launched in 2008, lauded any and all sources of energy as long as they were domestically produced. Mr. Pickens died last year at the age of 91.

Mr. Loftin said he got the idea for a renewable-focused fund after receiving a cold call from Morningstar Inc. at the start of 2017. The sales representative asked whether BP Capital would be interested in issuing something related to renewable energy. Morningstar was in the process of buying a 40% stake in Sustainalytics, which provides ESG research and ratings. The thought was that the two could join forces to offer a new type of renewable product for investors.

The renewable sector was heating up. BP Capital was in the process of setting up its BOON exchange-traded fund, which was meant to offer investors exposure to companies that benefited from a rise in global crude prices.

The problem was that they didn’t rise. Oil production was skyrocketing thanks to shale output in the Permian Basin. And years of overspending had sent investors in the companies responsible for the boom packing.

While BOON climbed almost 8% in the second quarter of 2018, it was flat in the third quarter and ended down almost 29% in the fourth.

Mr. Loftin saw an opportunity. Instead of launching a new renewable ETF, he decided to simply convert the crude fund.

BP Capital announced last July that it was making the switch. The new ETF would include companies that derive at least 5% of their revenue from renewable energy, or at least 10% from “green transportation.”

Mr. Loftin started making calls a month later, circling back to investors who had previously turned him down when he had sought their interest in the crude ETF.

Counting cost

One particular meeting signaled the mounting challenges BP Capital and its RENW fund faced.

“I remember going to a meeting in Dallas with this RIA,” Mr. Loftin said. “We had a good exchange,” he said. However, the investor raised concerns that the fund’s small size would require him to file additional paperwork if he took a sizable position. “That’s more cost.”

And cost is no small matter.

BP Capital was already charging a pretty penny for RENW, compared with the ESG products offered by Vanguard and BlackRock. A Vanguard fund that tracks U.S. companies screened for ESG criteria charges 12 basis points, or $1.20 for every $1,000 invested. BlackRock’s sustainable ETFs range anywhere from 10 basis points to 25 basis points. BP Capital’s RENW charged 65 basis points.

The fate of RENW, which had about $3 million of assets under management when it closed, may have been foreshadowed by a similarly priced ETF. In 2019, Exchange Traded Concepts shut two socially responsible ETFs less than two years after they started trading. They, too, charged 65 basis points. ALPS Advisors Inc. closed its Workplace Equality Portfolio ETF due to an inability to attract significant market interest. The fund’s fee was 75 basis points.

“No one goes to anything over 20,” said Bloomberg’s Mr. Balchunas.

Pressure for major issuers to cut fees on their ESG products is probably responsible for much of the rush into those funds, Mr. Balchunas said. BlackRock has reduced fees on a number of its ESG vehicles in Europe, with the cheapest being 7 basis points, according to Bloomberg Intelligence.

“Pretty much ESG lived in oblivion,” he said. “Then Vanguard entered into ESG and lots of high-profile products came in under 20 and that jump-started flows.”

BP Capital’s RENW wasn’t meant to be an ESG investment. Mr. Loftin said he saw what he thought was a good opportunity. While its dabble into renewables didn’t work out, BP Capital will continue to offer other products, including an oil and gas pipeline ETF.

“I’m not spooked by the space at all,” Mr. Loftin said of renewables. “But it was like trying to play in the NFL when we have the budget of my son’s second-grade soccer team.”