High oil prices, firm demand and climate change issues are working in favour of alternative energy sector. As oil prices continue to hover around record highs and climate change problems rise up government agendas, the case for investing in alternative energy is becoming more compelling. "Investors have been shunning mainstream energy equities over the past 18 months on the back of worries in the US. Instead they are heading to alternative energy equities,' says Robin Batchelor, co-manager of BlackRock , the Merrill Lynch New Energy Technology fund. A rush of alternative energy and climate change funds focusing on renewable power have appeared in the past year, including Sarasin, F&C, Schroders and Cowen Asset Management. Tim Guinness, manager of Investec Global Energy Fund and chief executive and founder of Guinness Asset Management, is also bringing his Guinness Alternative Energy Fund to the UK. It will replicate a fund he manages in the US, which returned 40.8 per cent last year. He is confident regulatory and economic demand for alternative energy will continue to power the fund. Demand from UK and European investors has triggered the launch and interest is also expected from Hong Kong and the Middle East. "Today's high energy prices are providing economic support to the alternative energy sector. The scale of the challenge of moving on from fossil fuels makes this an attractive area for long-term investment,' he says. He believes the industry "could sustain growth rates of over 20 per cent per annum for more than 20 years'. In the past six years the number of companies in the alternative energy sector, particularly in solar and wind power, has increased significantly. Fund managers say the companies are operating better than previously and will be a good investment. "The risk is they may not grow fast enough [to attract retail investors] but are attractive for long-term investors,' says Guinness. Among his top holdings in solar energy are Suntech and Q-Cells, while Vestas and Gamesa are favourites in wind turbines. Among alternative energy resources, solar energy is being selected increasingly by fund managers. "We like this fast-growing sector,' says Terry Coles, fund manager of Global Climate Opportunities Fund at F&C. He looks for companies that are low-cost providers, have something special to offer on the technological front and will survive long term. The Guinness Alternative Energy Fund invests about 35 per cent in solar, followed by 27 per cent in wind but only 5 per cent and 3 per cent in fuel cells and bio-fuels, respectively. Bio-fuels are falling out of favour among fund managers. Coles does not feel comfortable investing in them because "the economics of bio-fuels do not seem attractive', he says. "The cost of raw materials is rising too quickly and is too high.' Neither is Matthias Fawer, sustainability analyst at Sarasin, a fan of conventional bio-fuels: "We don't regard them as sufficiently sustainable and they also compete with the food chain.' In the Sarasin New Power Fund, launched last April, only 5 per cent is invested in bio-fuels compared with 25 per cent in solar and the energy efficiency sector. By 2020, the European Union wants renewable energy to represent 20 per cent of the total energy mix. Awareness of regulatory targets is growing but nonetheless investors "need to know it [alternative energy] is a volatile, high-risk sector with good long-term options', says Batchelor. In terms of returns, he recommends a long-term view on sectors such as solar and wind. The new wave of investor interest is pushing up the price of alternative energy equities, making traditional energy stocks look good value. "Traditional energy stocks are a better buy than alternative funds,' says Batchelor. He says investors are better off investing in new energy as part of a diversified portfolio and suggests leaving the bulk of their energy allocation in the less volatile and less expensive mainstream sector, with a much smaller focus on alternative energy. Sarasin's Fawer says appetite for the alternative energy sector has eased since the beginning of January as investors wait to see what is happening in the markets and the global economy. "But we have seen no outflows in the sector and we believe fundamentals for renewables are still intact,' he adds. But, despite a worsening economic outlook Coles is upbeat about the future of investing in the sector. "I feel fairly confident, with demand for oil outstripping supply. Even if there is an economic slowdown, alternative energy funds will be attractive to investors.'