Fallout from the Enron scandal continues to affect the US utilities sector with performance of the s...
Fallout from the Enron scandal continues to affect the US utilities sector with performance of the sector down against the S&P 500.
Utility companies have massively underperformed the S&P 500 this year with total return for the year to date standing at -71.05%, well below the return generated by the S&P 500 index for the same period.
Indeed, the multi-utilities sector, comprising seven companies, is the worst performing sector within the S&P 500 for the year to date, with an overall performance of -71.07%. All but two of the companies, Duke Energy and El Paso Corporation were among the bottom 20 performers in the S&P 500 with Dynegy returning the worst performance in the index, a dismal -96.39% over the year to date.
Elaine Crichton, manager of the Aegon American fund, says the problems in the sector came with the implosion of the merchant energy companies such as Enron. Following the demise of Enron, the industry collapsed and the huge underperformance of companies such as Calpine, Dynegy and Enron has dragged down the overall performance of the whole sector she says.
In addition, she says, both Moody's and S&P downgraded the whole sector regardless of whether a company was involved in energy trading or not.
This has made it harder for the utility companies involved in just electricity generation to borrow and made life difficult for them, she says.
'Some investors would not touch utilities with a bargepole at the moment,' she says, noting that this can mean there are companies with low valuations that can be a good buy. Aegon holds three stocks at present, Southern Company, Exelon and Dominion Resources she says. All three are large- cap electricity generators with strong balance sheets and robust earnings expectations. Although she is overweight these companies relative to the S&P 500, she says the fund is underweight for the sector by nearly 1%.
Alison Sinclair, investment manager on Britannic's American desk, is even more bearish on the sector.
She holds just one utility, Southern Company, describing it as a plain vanilla utility. Her holding is for much the same reasons as Crichton. 'It is a long-established regulated utility and has reasonable yields at 5%.'
Britannic, she says has a underweighting in the sector ranging from 1.5% to 2% across its American portfolio relative to the S&P 500. In the long term she believes the woes in the sector may be a good thing as weaker companies will be weeded out leaving better value companies for investors. However as the sector is a defensive one, she does not think utilities will be in the front line to benefit from an economic recovery noting that there are other better ways to play such a recovery.
Crichton at Aegon sees a possible benefit in the near term in the fact that although telecommunications has performed almost as badly as utilities for the year to date, for the month of October it has lifted performance by 33%. This has been a rush of blood to the head, she says, and comes from investors avoiding utilities and looking for another similar sector in which to invest.
Good valuations can be found in the sector.
Some reasonable yields available.
Tactical play between telecoms and utilities.
Awful performance for the year to date.
Investor sentiment remains bad.
Ratings downgrades on the horizon.
Follows McVey's resignation
Schroders and Aviva Investors
LightTower Partners, Seneca Partners and Unicorn AM
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