InvestmentsSep 5 2016

Fund Review: Premier Global Utilities Income

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The £30m Premier Global Utilities Income fund has been managed by Claire Long and James Smith since July 2012, at which point the objectives of the fund were overhauled.

Initially launched as the Premier Global Power and Water fund in 1987, the vehicle invested predominantly in renewable energy and utility technology companies but, following Mr Smith’s appointment, the investment strategy focused on income and long-term growth through investing in global utility investments. The fund was renamed the Premier Global Utilities Income fund in December 2014.

Sitting in the IA Global Equity Income sector, the fund aims to produce income and long-term capital growth, achieved with low returns volatility and low correlation to markets. Ms Long explains: “The fund invests in utilities in both developed and emerging markets with a preference for regulated stocks with stable, visible cash flows and growing dividends.”

Since 2012, the fund has focused on the regulated monopolies operating electricity wires, and gas and water pipes around the world. Ms Long says: “These are distinct from areas such as power generation and energy supply, which, in most countries, are competitive, market-based activities, and which are only a secondary focus for the fund.”

Given this specific focus, the manager points out there is less of a macroeconomic tilt to the fund, as “regulated utilities can be shielded from demand risk, insofar as their returns are set by an independent regulator with reference to their asset base rather than sales”.

She adds: “Regulation typically also enables these companies to pass through interest costs and movements in commodity prices, and also provides an inflation linkage. As such, they can be relatively protected from macroeconomic movements that occur during a regulatory cycle – at least until the next regulatory review. In addition, as they essentially operate domestically, the fortunes of regulated utilities are driven by domestic, rather than global, factors.”

EXPERT VIEW - Oliver Stone, head of research and deputy portfolio manager, Fairstone Private Wealth
This fund aims to provide growing income with long-term capital growth through investment in companies worldwide involved in the power, water and listed infrastructure sectors. Run by Claire Long and James Smith, the fund exhibits a mid-cap, value bias, despite having exhibited a few periods of relative underperformance under the managers’ tenure, it does stand out as a potential, albeit specialised, diversifier among other global equity income funds due to the portfolio’s sector specificity and geographic variation.

In the past four years, the fund has typically maintained a weighting of 15-20 per cent in China, although Ms Long notes: “This year, we have reduced the fund’s exposure to coal-fired generation in favour of cleaner energy. Beijing Enterprises Holdings, which owns Beijing’s gas distribution network, is one of the fund’s largest positions. With China seeking to reduce air and water pollution, increasing gas usage has seen the company grow its earnings between 2010 and 2015.”

The manager adds that the team does not attempt to mimic the make-up of global utility indices, which are dominated by large US and European names, but instead has “constructed a portfolio that draws on the team’s analysis of the utility universe and encompasses a significant number of smaller or under-researched companies alongside more ‘household’ names”.

The fund’s C accumulation share class has a risk-reward level of five out of seven with ongoing charges of 1.28 per cent.

Since June 30 2012, the fund has delivered a return of 75.5 per cent to August 8 2016, compared with the FTSE All-World Utilities index gain of 58.3 per cent and the IA Global Equity Income sector average of 59.5 per cent, rebased into sterling, data from FE Analytics shows.

According to Ms Long, the most significant contributors to the fund’s performance during the past four years have been its Chinese holdings, including China Everbright and China Power International, together with regional multi-utilities in Italy, such as Hera and Acea.

She adds: “Until recently, the main detractors from performance had been the fund’s Brazilian utilities, which suffered as a result of weakening economic conditions and a drought that curtailed the country’s hydroelectric power generation. So far in 2016, however, with an improved political situation and an end to the drought, the stocks have been among the fund’s best performers.”

Ms Long points out that currency has periodically been a headwind for the fund, which has generally been unhedged and with a minority of the fund’s holdings denominated in sterling. She notes: “Since the Brexit vote, this has clearly been a tailwind and, if it remains at current levels [or falls further], will continue to benefit both the fund’s capital and its income. Meanwhile, during periods of uncertainty, utilities can be one of the more reliable sectors.”