Utilities as a traditional defensive sector have been attractive in the recent bear market but thi...
Utilities as a traditional defensive sector have been attractive in the recent bear market but this position may be changing, according to Gartmore.
Eric Moore, fund manager of Gartmore UK Growth, says utilities tend to be underweighted in his portfolio because of their relatively predictable nature. He selects stocks by trying to pick companies which will show unexpected growth.
Moore points out that predictably timed regulatory reviews play a large part in determining share price and says it is time to move out of utilities. "Utilities are defensive. It's time to buy cyclical stocks because I think we're coming to the end of the downturn," he argues.
However, Stephen Whittaker, head of UK investment at Invesco Perpetual, believes utilities will continue to be strong performers and is increasing his weighting in them. He sees the strong yields of utilities as an advantage. He says: "It's a no-brainer. Electricity, water and gas have a superior yield and there is a certainty of earnings that is especially good in current conditions."
Whittaker sees International Power, Innogy, National Grid, the Lattice Group and Severn Trent as being strong performers. He cites British Energy as being in a good position because it is highly geared to the price of pooled energy, which he sees as more likely to go up than down.
Moore, however, warns that British Energy, being a nuclear power company, may not be in a good position to deal with more volatile prices arising from the end of pooled pricing.
Moore is very underweight in electricity and water but overweight in gas with big holdings in Centrica. He sees Centrica as a 'virtual utility' because it doesn't own pipelines and only has a few gas fields. He says: "It's more of a selling and marketing outfit than a utility. It has a big customer base and is an excellent position to cross-sell."
Moore points to the company's recent diversification into insurance and acquisition of the AA as examples of how it is using its position to grow.
Electricity holds little value in Moore's portfolio but he points to Scottish and Southern Energy as a good example of a solid utility that has performed well over recent years, although he doesn't hold any. "It is a solid nuts and bolts utility that has rewarded patient shareholders. It's a classic defensive utility," he says.
Electricity companies will have to deal with a more unpredictable pricing environment because of the New Energy Trading Agreements, which mean that prices will fluctuate with demand. Powergen has limited the effect this will have by vertically integrating. It has bought suppliers, ensuring a steady supply, and has decreased its exposure to generation. It has also grown by using its electricity distribution system to expand into telecoms, putting fibre optic cables on its extensive network of electricity pylons.
Moore sees the huge American market as having excellent potential growth for National Grid. He says: "Part of the problem in America is that they have never had a national system for distributing energy. National Grid is in a good position to expand into the distribution market," he says.
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