Beyond Bulls & Bears

Shedding Light on Utilities

For many of us, our experience with the utilities industry is limited to a passing admiration of electricity grids and gratefulness that our running water and power work as they should. But for John Kohli, Portfolio Manager of the Franklin Utilities Fund, utilities run his daily life –literally and figuratively. In the excerpted conversation below, he’ll help us explore recent dynamics in the industry. 

On Utilities Regulation:

Thanks to deregulation, Kohli says some utilities have “stretched” the definition of a utility company. While this presents an interesting opportunity for the company to diversify, investors may not be buying into what they thought. When is a utility not a utility company?  When it’s a utility/international telecommunications company. 

The fund’s focus, Kohli says, is on regulated utilities, in part to help reduce exposure to some volatility: 

“By investing in regulated utilities we want companies that pay steady dividends, have steady cash flows and predictability of earnings in cash flows. We are trying to avoid any type of economically sensitive sector that would create volatility in a time period like we have just witnessed in August.” 

Another wrinkle in the utilities space is that regulatory environments vary widely between jurisdictions. This creates plenty of homework for those interested in investing in utilities.  As Kohli notes:

“We like to have a good, high level of comfort in the regulatory environment in which we invest. When you think about U.S. utilities, you are thinking about 50 different regulatory environments. Each state is regulated in a different manner. When you venture outside the U.S. you start to lose some of that perspective on what’s going on from a regulatory policy perspective.” 

On Alternative Energy:

Shifting attitudes regarding global warming and the need for alternative fuel sources may also benefit utilities, says Kohli:

“We have seen a shift in the way people are viewing greenhouse gas emission risks going forward and how it will impact global warming in the future. That’s created numerous opportunities from a technology perspective in terms of solar, wind, and geothermal power – anything that’s not a traditional fossil fuel method of generating energy. California, for instance, has instituted a 33% renewable energy mandate.

From our perspective in the utility fund, focusing on regulated-type utilities is creating opportunities in companies throughout the U.S. as renewable energy policies are being put in place. While we don’t invest in the absolute technologies, utilities are a secondary beneficiary because of the growth of transporting those renewable energies from places like the desert or high wind areas into populated areas, thus creating good growth opportunities for these types of companies.”

 

In an investing environment where some of the recent change has perhaps been unwanted, this type of change may be the sort more investors welcome.

Until next week, Beyond Bulls & Bears leaves you with a quote from Sir John Templeton: 

“’This time is different’ are among the four costliest words in the English language.



IMPORTANT LEGAL INFORMATION

In addition to other factors, securities issued by utility companies have been historically sensitive to interest rate changes. When interest rates fall, utility securities prices, and thus a utilities fund’s share price, tend to rise; when interest rates rise, their prices generally fall. These and other risks specific to the public utilities industry are described more fully in the fund’s prospectus.

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