Last week, all 12 industry sectors tracked by Morningstar finished down as the weight of the credit crisis, weak earnings growth, and concerns about an economic slowdown or recession bore down on a topsy-turvy stock market.
Energy, telecom and technology, the sectors that have, as Bloomberg reported Monday, “kept the U.S. bull market from collapsing” in recent months, struggled to an average one-week loss of more than five percentage points. Utilities, on the other hand, posted the narrowest slide, just 0.21%. iShares S&P Global Utilities (NYSEARCA:JXI) did even better, with a 1.3% NAV return that was nearly five percentage points better than the S&P 500, which fell 3.7% for the week.
In fact, the sector and JXI have been on a run lately. Consider that as of Nov. 9, utilities ranked second-best for one-month returns [2.9%] and fourth for three-month [11.4%], three- and five year annualized returns [28.9% and 30.4%], trailing only energy, telecom and industrial materials.
JXI, a 14-month-old ETF that combines the recession- resistant characteristics of utility stocks—slow, steady earnings, dividends, and largely inelastic demand regardless of the economic climate—with exposure to global markets, is up nearly 37% since its inception. That global emphasis helped the fund strongly outperform the U.S.-heavy Dow Jones Utility Index, which gained 21.5% over the same period.
In fact, JXI’s emphasis on Europe, at 52% of assets, has helped the fund rank in the top 17% of utility funds ranked by Morningstar for all the periods it’s been eligible. By contrast, the U.S.-focused iShares Dow Utilities is up just 14.7% year to date.
A small fund - $87 million in assets - that leans toward large [average market cap of $35.5 billion] value names, JXI came on the scene during a five-year, post-Enron run-up, when utilities stocks transformed from safe bets for income investors into a major growth story. The Dow index more than doubled over the last four years, as growing demand pushed prices and profits ever higher and a string of consolidation drew attention and premiums to the sector.
The flow of deals was particularly strong in Europe, where rising power prices and margins prompted ING (NYSE:ING) to upgrade the sector in late October to overweight.
The latest mega-deal, the $42.5 billion euro purchase of Spain’s biggest power company, Endesa [up 13% year to date], by Italy’s Enel (EN) and Spanish builder Acciona, closed in October, but not before it involved several key JXI holdings. No. 6 holding Enel [11.7% 30-day return] ended up with the Endesa stake only after No. 22 holding Gas Natural started the process with a hostile bid two years ago. Top holding E.ON (OTCPK:EONGY) [up 18.6% for one month], trumped that bid before the winners stepped in. Still being finalized is a $12.5 billion E.ON purchase of some Enel assets that was part of the takeover agreement. [Last December, Endesa was JXI’s fourth-largest holding.]
No. 3 holding Suez (OTC:SZEZY) [16.3% three-month return] is expected to close its purchase of Gaz de France in early 2008, creating a company with revenue of nearly $100 billion, one of the three largest utilities in the world.
No. 2 Iberdrola [up 43% year-to-date] is buying No. 10 Scottish & Southern [up nearly 60% since the deal was announced].
The run on utilities deals, which hit a record $420 billion in 2006, according to KPMG, comes as firms look to capitalize on soaring prices and markets opening up to competition through continued deregulation, seeking economies of scale and other revenue streams. Investors have been on board, pushing up the stock prices of those involved, even if only by speculation.
In the meantime, European power companies have posted a string of strong earnings reports, and this trend is expected to continue this week with E.ON and Scottish & Southern, according to Reuters. "Electricity prices on the utilities' home markets will be driving earnings," said Ian Mitchell, head of European utility research at JP Morgan.
Exelon (NYSE:EXC) is the only U.S.-based stock among the top 10 holdings, though there are several in the next 10.
The European focus may also give JXI a leg up on its peers in alternative energy, because many of the continent’s goliaths are buying up wind-energy assets in the U.S. E.ON last month announced plans to buy $1.4 billion of North American wind assets from Ireland- based Airtricity.
Whether the stellar run of European power companies can continue depends on a host of factors. But with all the fears in the U.S. right now, a small stake in JXI, with its combination of safe stocks and exposure to growing markets, could boost a diversified portfolio during a downturn.