Seeking Alpha

varan's  Instablog

varan
Send Message
Individual investor.
  • An Annually Updated Portfolio Of Utility Stocks 7 comments
    Jan 5, 2014 9:47 PM

    Although utility stocks are, in general, relatively safe investments, utility mutual funds and ETFs have historically led to annual losses that are not necessarily tolerable especially for those investors who are particularly attracted to these funds for their low volatility.

    An annually rebalanced portfolio of a subset of assets selected from a larger basket of utility stocks with the allocations computed on the basis of the most diversified portfolio algorithm (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1895459 ) appears to be much more robust than many utility funds.

    The basket consists of these stocks

    AWR AWK WTR ARTNA CTWS MSEX SJW YORW UGI WR SRE WEC ED

    SO BIP D NEE NGG OKE DUK

    On the first trading day of every year we select ten of these stocks whose performance was the best during the prior year. If one or more of these stocks performed worse than the Barclays' Aggregate Fund (for which we use VBMFX as a proxy for the calculations), the worst of the ten is replaced by VBMFX. The allocation to the components of this selected basket is determined on the basis of the most diversified portfolio algorithm, and the investment is made for the whole year.

    The results for the period 1991-2013 are summarized below:

    CAGR 15.3%

    Sharpe Ratio .95

    Sortino Ratio 1.70

    Maximum Drawdown 12%

    Number of years of annual losses (2, [1994 -5.9% 2008 -1.5%])

    2013 Return 16%

    The equity curve, the Manhattan allocation diagram and the raw allocation diagram are shown in the following figures.

    (click to enlarge)

    (click to enlarge)

    (click to enlarge)

    Note that the most diversified portfolio does not necessarily include all of the ten assets that are used to construct it. The following figure shows the variation of the number of assets during the various years.(click to enlarge)

    The following table compares the CAGR of some mutual funds and ETFs since their inception with the CAGR of the strategy during the same period. The substantially higher returns of the strategy and the lower draw-downs suggests that it is worth further consideration.

    Fund Name

    First Year

    Fund CAGR

    Utilities CAGR

    Fund Max. Annual Loss

    Max. Annual Loss (Utilities)

    XLU

    1999

    4.9%

    12.2%

    28%

    1.5%

    IDU

    2001

    3.7%

    11.6%

    30%

    1.5%

    RYU

    2007

    4.8%

    11.1%

    30%

    1.5%

    FXU

    2008

    4.4%

    11.5%

    29%

    1.5%

    VPU

    2005

    7.7%

    13.4%

    28%

    1.5%

    FIUIX

    1991

    8.5%

    15.3%

    35%

    5.9%

    For 2014, the strategy invested in the following stocks:

    NGG (33.2%) CTWS (15.7%) YORW (11.4%) OKE (10.3%) NEE (9.6%) WTR (8.8%) AWR (5.7%) D (5.3%).

    Of course, there are a lot of prognostications of imminent increase in interest rates and the subsequent and consequent collapse of stocks in the utilities, and so any decision to invest in these equities should be made with great caution and deliberation. In any case, this is not investment advice in any shape or form, but just a summary of some results that I think to be somewhat interesting.

    Disclosure: I am long SRE, WEC, NGG, CTWS, YORW, OKE, NEE, WTR, AWR, D.

Back To varan's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (7)
Track new comments
  • mlbonin
    , contributor
    Comments (2) | Send Message
     
    varan,

     

    Thanks for another of you always insightful and helpful articles. I note in your disclosure that the stocks you own are not in the list of recommended stocks. Have you simply not rebalanced or do you use an alternate strategy in addition to this one. Thx
    6 Jan, 08:06 PM Reply Like
  • varan
    , contributor
    Comments (3606) | Send Message
     
    Author’s reply » Updated my portfolio today. Changed the disclosure.

     

    Thanks for your interest.

     

    (By the way, I am not 'recommending' these stocks as mentioned at the end of the post.)
    6 Jan, 11:18 PM Reply Like
  • Learner16
    , contributor
    Comments (112) | Send Message
     
    Thanks, Varan, for a very interesting article.
    8 Jan, 04:26 PM Reply Like
  • MrBobDobalina
    , contributor
    Comments (69) | Send Message
     
    Great stuff, Varan, as usual.

     

    By the way, how does an equally weighted portfolio of the same 10 utility stocks compare?
    9 Feb, 09:54 PM Reply Like
  • varan
    , contributor
    Comments (3606) | Send Message
     
    Author’s reply » Thanks.
    Not too bad, especially for the years when VBMFX is not in the selection. All the allocation methods tend to over-weigh low volatility assets and that helps a lot. So with equal weights the drawdown (and of course the volatility) is higher.
    CAGR 13.9%
    Sharpe Ratio .75
    Sortino Ratio 1.22
    Maximum Drawdown 27.9%
    Number of years of annual losses (3, [1994 -2.2%1999 -2.7% 2008 -15%])
    2013 Return 15.9%
    10 Feb, 12:00 AM Reply Like
  • MrBobDobalina
    , contributor
    Comments (69) | Send Message
     
    OK. So similar to your DG510 portfolio, solid returns that still suffered a large (although smaller than the S&P) drawdown in '08. I assume this allocation strategy would improve the results of that strategy as well?
    10 Feb, 08:53 AM Reply Like
  • varan
    , contributor
    Comments (3606) | Send Message
     
    Author’s reply » That could indeed be the case. If I try that sometime, I will post the results. Thanks.
    10 Feb, 01:47 PM Reply Like
Full index of posts »
Latest Followers

StockTalks

More »

Latest Comments


Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.