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An Annually Updated Portfolio Of Utility Stocks

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.

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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)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%

Click to enlarge

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.