Infrastructure investors have had their share of pain over the past few years, particularly in developing countries. Aside from worries about the safety and stability of the investment itself,...
The Institutional Investor: Still Hot on Utility Stocks?
Michael R. Yogg, who manages Putnam's Global Utilities Fund, explains what investors want from the sector.
would reflect the true economic value of the company's assets. They have generation, in particular nuclear generation, that can produce power at well below market prices. Some companies will profit from these conditions; but the regulatory process, the political process, and public relations concerns will limit the companies’ freedom of action. They will do well but they will have to compromise, give in a little, or phase in their rate increases to get the type of market regime that they want. If they can soften the impact on consumers, they will probably do better in the long run. They have to get along with their regulators and their customers.
Fortnightly: What are your top three holdings in the United States, and why do you like them?
Yogg: The largest holding is Exelon. The move in Illinois toward a deregulated power market and an auction system for procurement will improve the quality of their business and their profitability after 2006. Pennsylvania, their other major franchise, will follow in a few years. Dominion Resources is undervalued because their shareholder base is schizophrenic. Those who view it as a utility want to maximize cash flow, while those who own it for its oil- and gas-production assets want to increase investment to realize the value of their energy reserves. This problem can be solved through some kind of restructuring, so it is a good opportunity for investors.
Entergy is still recovering from Katrina, but it will recover. Meanwhile, they have tremendously valuable nuclear generation in the Northeast. PG&E is our largest pure regulated play. It is still recovering from the bankruptcy of its utility sub. As a result, it has tremendously supportive regulation but also good growth opportunities.
Fortnightly: What would draw away your investment from U.S. utilities?
Yogg: My alternatives are Europe, Japan, bonds, and telecom. Our utility fund has about 65 percent North American electric and gas, about 14 percent in utility and infrastructure in Europe, 6 percent in Asia, and 15 percent in global telecom, which is spread all over. Overall, 85 percent utility-like and 15 percent telecom. The main risk to the relative performance of U.S. utilities would be a weakening of the U.S. dollar.
Fortnightly: Much has been made in the investment community as to the higher value placed on utility stocks because of the dividend tax repeal. Would you change your holdings in utilities if at some point the dividend tax were re-enacted?
Yogg: If we lost the favorable treatment on dividends it would make utility stocks marginally less attractive. We would probably own more bonds then, all else being equal. But to the extent I run a utility fund, I’d still be invested within the sector.