Enhance Your Utility Sector Returns



Comments (2)

  1. Will Koenig says:

    Which is all good and well, except, what is the cause for divergence between the two at about year 2002? Does it have anything to do with needed agency approvals for rate increases? And more significantly, how might the future environment for rates affect this?

    [Reply]

    Alan Gula

    Alan Gula Reply:

    Hi Will,

    Great question. First of all, no strategy will outperform all of the time or else everyone would employ it and the anomaly would disappear. Even though it’s hard to see from the chart, the Expensive Utilities Composite has outperformed since the beginning of 2012. Many people have chased performance in the utility sector, and highly-levered firms have done well as risk aversion has waned. The cheap utilities are due for outperformance, and it may or may not be imminent.

    Also, I’ve made it clear that I think the risk of a significant rise in interest rates is low. Nonetheless, if long-term rates were to spike, I would expect the expensive, highly-levered utilities to get crushed and drastically underperform their cheap counterparts.

    Regards,

    Alan Gula

    [Reply]

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