Utilities’ specialists Reaves celebrates the strength of the asset class

John Bartlett, Reaves

The US utilities ETF UTES, from the specialist utilities investment house, Reaves Asset Management, had a difficult 2020 but is enjoying 6.5 per cent performance year to date. 

John Bartlett (pictured), Reaves’ president, explains that utilities will thrive in the US under the Biden infrastructure plan and that an investment in utilities could be seen as an ESG investment.  

He notes that as a firm, they have seen a difference in utility companies that have true ESG bona fides. “Companies are closing coal plants and building renewables and have a financial incentive to do so,” he says. “There’s an ESG story in every utility company and if you look at folks who really are committed to achieving ESG outcomes there is not a better place to be than the utilities industry because if you buy ESG you don’t really know what the companies are doing with your money. 

“If you want to have an impact on the environment, a dollar invested with a utility company is a dollar invested in energy efficiency and the money goes right into the community as utilities are the biggest employers of veterans and the workforce is a reflection of its community.” 

Reaves the firm has about USD3.2 billion in total assets under management with about half in utility stocks and the rest in infrastructure-related sectors, and USD33.5 million in the ETF. He describes the firm’s approach as a very conservative equity manager, trying to achieve average returns with below market risk. “If you were to walk on the efficient frontier, leaving Bondland, the first village you would get to before Equities, is us,” he says. 

“We buy utilities and cable companies and communications’ infrastructure companies with the objective of achieving high single digit returns through 5-7 per cent earnings growth plus a dividend yield of 3 per cent.” 

The investment markets of 2020, with everyone working from home and putting more strain on utilities, ought to have suited a utility fund, Bartlett says, but comments that over the year, interest rates got cut in half. 

“I can’t pinpoint exactly why we underperformed last year but investors are more interested in factors than they used to be,” he says. He believes that utility companies are pretty special companies, referring to them as a bond substitute. 

“Utility stocks are generally pretty well correlated with bonds and the reason is that people buy them for their income,” he says, commenting that the correlation with utility stocks and the 10-year Treasury is about 0.9.   

Market volatility hit the fund hard in 2020 and investors dumped utilities in favour of big tech stocks as they wanted low volatility. 

“2021 has been pretty good as interest rates have continued to work their way higher and utilities have recovered some,” he says. 

The utility sector awaits the Biden infrastructure plan. “This is an industry where increases in capex are generally well received by investors,” he says. “It’s a wonderful funding environment and it’s not hard for utilities to spend more money and get the financing and they have the incentive as they grow by spending more money.” 

Reaves expects to see more spending on electric transition to solar or wind power in the new bill. “The US has one of the best onshore wind areas, almost in the world,” he says. “The reason for that is the US is one of the few places where the land goes from the tropics to the Arctic Circle so there are big temperature differentials which are not moderated by large bodies of water or the Gulf Stream.” 

However, the wind resource sits in the centre of the country and is hard to transport to the coasts. “Cost sharing is a big issue,” Bartlett says. He expects to see an increase in corporate taxes in the infrastructure bill, which is good for utilities on a relative basis because utilities recover their income taxes in rates.  

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