OCTOBER 2014 The Research Guide to Electric Utility Investing 37
Research Guide To ELECTRIC UTILITY INVESTING 2014
The 2014 Electric Utility Investment Roundup
BY ED MCCARTHY, CFP
Electric utilities’ stocks are off to a strong start in 2014 and continue to provide investors with a steady
stream of dividends and total return.
We asked five experienced electric
utility portfolio managers for their
views on the sector’s recent performance and outlook: John Kohli, CFA,
portfolio manager of Franklin Utilities Fund (FKUTX); Oliver Pursche,
co-portfolio manager of the GMG
Defensive Beta Fund (MPDAX);
Maura Shaughnessy, CFA, portfolio
manager of the MFS Utilities Fund
(MMUFX); Douglas Simmons, portfolio manager of the Fidelity Select
Utilities Portfolio (FSUTX) and Fidelity Advisor Utilities Fund (
FU-GAX) and Bryan J. Spratt, CFA, portfolio manager and research analyst
with Miller/Howard Investments.
How has this group performed
Kohli: While utilities had good absolute performance in 2013, up about
13% for the year, these returns failed
to match the 32% return of the S&P
500. Through the first half of 2014
however, utilities have outperformed
the S&P by more than double. Individual company returns have been
widely dispersed within the various
subsectors of the utilities industry.
Pursche: In 2013 through 2014,
we saw these sectors, particularly the
eastern sector, all perform well. Several factors, such as decreasing interest rates, helped boost performance
of the industry as a whole, but it was
poor weather in the eastern and central regions that drove performance to
Shaughnessy: The utilities sector reversed course
dramatically during the first
half of 2014 and strongly outperformed the broad market.
The sector was helped by falling interest rates, a continued
hunt for yield by investors and
colder winter weather, which boosted
power demand and natural gas prices.
In this period, the companies that
were most sensitive to an improving
power environment did the best. This
included mostly independent power
producers and integrated companies
and fewer fully regulated businesses.
Simmons: Not surprisingly, utilities underperformed the market in the
midst of a 30%-plus rally in 2013, but
my funds were still up 20% in 2013.
For the first half of 2014, the group
had very strong relative and absolute
performance and was the top-per-forming sector, up 16% compared to
the broader market up 6%.
Spratt: So far in 2014, utilities have
outperformed the market in each of
the first two quarters. It’s a little early
to call, but it’s shaping up to look like
another 2011-like year, which was
strong for utilities. The appetite for
yield is great, and the stability of infrastructure assets and essential services
supports owning the group.
Has the sector differed
from your expectations?
Kohli: Utilities have done
better in 2014 than we would
have projected, particularly
as regulated companies.
Regulated utilities were well
positioned fundamentally heading
into 2014, but a steady decline in the
10-year Treasury yield from the 3%
level at year-end has led to stronger
returns than anticipated.
We did anticipate some improvement in integrated electric company
returns, so long as power market
fundamentals improved. The polar
vortex weather conditions faced last
winter helped drive volatility in gas
and electricity prices, which led to
stronger performance from companies with market exposure.
Pursche: After adjusting for unusual weather and the demand that was
seen as a result of it, the performance