Sector overview
Definition
Here is the GICS® definition by MSCI and Standard & Poor’s:
The Utilities Sector comprises utility companies such as electric, gas and water utilities. It also includes independent power producers & energy traders and companies that engage in generation and distribution of electricity using renewable sources.
Companies
This sector contains 30 companies in the S&P 500 and 35 in the Russell 2000. Here is the list of the 10 largest capitalisations at the time of writing, arranged in alphabetical order by ticker:
Table 13.1: Stock examples: S&P 500 Utilities
S&P 500 strategy
Individually relevant factors
Here are the factors from my working list that are individually relevant for the S&P 500 Utilities reference set:
Table 13.2: Individually relevant factors: S&P 500 Utilities
Strategy description
This time I will use two rules on the same growth ratio.
Table 13.3: Strategy description: S&P 500 Utilities
This is a contrarian strategy because the second rule selects the companies with the weakest growth rate. But the first rule excludes companies that are significantly losing their market. The thinking behind this strange strategy is that among large Utilities companies, stability pays for the shareholder. In this reference set, the more boring the business, the better for investors. An element of importance is that this sector has a higher concentration of companies paying a high dividend.
Basic simulation
Fig 13.1: Simulation data and equity curve: S&P 500 Utilities
Hedged simulation
Fig 13.2: Simulation data and equity curve: S&P 500 Utilities, Hedged
Consistency
Annualised returns with hedging by five-year periods:
Table 13.4: Consistency over five-year periods
Comment
As a defensive sector, Utilities has a lower risk than cyclicals. The return is significantly lower than other defensive sectors: Consumer Staples and Health Care. All five-year annualised returns are above 10% (hedged), however a weaker return for the last period might be reason for caution.
Russell 2000 strategy
Individually relevant factors
Here are the factors from my working list that are individually relevant for the Russell 2000 Utilities reference set:
Table 13.5: Individually relevant factors: Russell 2000 Utilities
Strategy description
I will use a single valuation ratio.
Table 13.6: Strategy description: Russell 2000 Utilities
The selection is focused on cheap companies regarding their projected earnings.
Basic simulation
Fig 13.3: Simulation data and equity curve: Russell 2000 Utilities
Hedged simulation
Fig 13.4: Simulation data and equity curve: Russell 2000 Utilities, Hedged
Consistency
Annualised returns with hedging by five-year periods:
Table 13.7: Consistency over five-year periods
Comment
The small cap strategy has very similar characteristics to the S&P 500 portfolio. There is little incentive to take liquidity risk. All five-year annualised returns are above 15% (hedged), which is more encouraging.