Investors usually have to contend with a balance between income and growth.
Not so with the Reaves Utility Income Fund, which has a 6.48% dividend yield and performance that has outperformed the S&P 500 index.
This is a 15-year chart of total return (including dividend) for the Reaves Utility Income Fund
and the S&P 500
It is unusual, given that the benchmark index is driven by a strong concentration in large cap technology companies including Amazon.com Inc.
and Microsoft Corp.
Here is a comparison of the fund’s return against the S&P 500 for different periods:
|Total return – 2020 through May 29||Average return – 3 years||Average return – 5 years||Average return – 10 years||Average return – 15 years|
|Reaves Utility Income||-7.9%||6.2%||10.7%||14.7%||11.9%|
|S&P 500 Index||-5.0%||10.2%||9.9%||13.2%||8.7%|
Scroll through the table to see all the numbers.
John Bartlett, who jointly manages the fund at Reaves Asset Management, discussed his strategy, holdings and how utility companies operate in an interview.
Reaves Utility Income, which is a closed-end fund, is designed to provide a high after-tax income, along with capital appreciation, by having a portfolio that is at least 80% invested in companies that provide products or services to generate or distribute electricity , gas or water, along with companies involved in telecommunications, infrastructure, toll roads and municipal services.
So there is a broad definition of “utility”, which you can see by looking at its top 10 holdings:
|Business||ticker||Industry||Percentage of portfolio||Total return – 2020||Total return – 3 years||Total return – 5 years|
|NextEra Energy Inc.||
|Union Pacific Corp.||
|Verizon Communications Inc.||
|WEC Energy Group Inc.||
|Dominion Energy Inc.||
|Altice USA Inc. Class A||
||Cable / satellite TV||3.6%||-6%||N / A||N / A|
Conventional wisdom is that you cannot make much money from investing in capital-intensive, slowly growing companies. Bartlett explained that some of these companies can increase revenue when investing in expanding or improving electricity grids, pipelines, water or other infrastructure.
“Tools get paid for the amount of investment they have on the ground,” he said.
Infrastructure projects for regulated tools are designed with the authorities’ input.
“The Commission determines what kind of return on equity the tool can [expect], and then you can find out how much a company can allow to earn, “Bartlett said. So he and his team analyze the plans for expansion or improvement projects as part of their selection process.
As a resident of Southern Florida, I pointed to Florida Power & Light Co., which has greatly reduced the time it takes to restore electricity after power outages over the past 16 years. (It is anecdotal, based solely on my personal experience, living in an area with frequent power outages due to storm activity and a ground network over the ground.)
Bartlett pointed out that FPL is a subsidiary of NextEra Energy Inc.
the fund’s largest holding.
He said NextEra was “a big company and very well managed.” He pointed to Florida and estimated a $ 1 billion daily GDP for FPL’s service area, saying “to the extent they can lose a few days in general shutdowns,” after a hurricane or tropical storm, “pays for the entire effort . “
Much of the fund’s long-term success has come from its focus on investing for total return, while not using as much leverage (borrowing money to invest more and increasing portfolio return) as is allowed, Bartlett said. The fund’s maximum leverage is 33%, while it was 29.9 leverage as of May 29, according to Morningstar.
Focus on total return means distributing capital gains as part of the monthly dividend. Bartlett said the strategy is “to book our profits pretty early in the year, so we don’t have to do something that isn’t on our terms.”
“We see the fiscal year as a planning period,” he said. “If we do well, we can act as we consider most cautious for this year’s balance sheet.”
A traditional open marriage creates new shares when investors raise money and redeem them when investors sell. The shares are not publicly traded. The share price is really the net asset value (NAV), which is the sum of the market values of all the fund’s holdings, divided by the number of shares. You can only buy or sell units in a mutual fund once a day in the market close by.
Closed funds have a certain number of shares. They are traded on public exchanges, as well as exchange traded funds (ETFs). However, most ETFs are passively managed, while closed-end funds are actively managed. In addition, a closed-end fund may trade at a significant premium or discount to the NAV, while an ETF tends to trade near the NAV.
A closed-end fund can be expanded by issuing more shares, which is usually done through a rights offer that enables current shareholders to buy new shares at a discount.
A complication is avoided
Some investors avoid closed-end funds because the fund managers sometimes decide to return some of the shareholders’ equity to them, as part of the dividend. This can have tax advantages, but it can also be done simply to increase returns. If a fund returns its shareholders’ equity repeatedly, it will result in a decline in NAV and the share price.
Bartlett said that the Reaves Utility Fund has never returned its shareholders’ equity since it was founded in 2004, and that it is against the company’s philosophy to do so.
“We place great emphasis on growing the revenue stream from UTG to the extent that we can support it. For us, that means earning it, ”he said.