BUI Vs. UTG: Looking For A Diamond Fund In The Utility Rough
Summary
- Two weeks ago we gave a sell rating for the Utilities sector. So far, this has proven to be spot on.
- Nonetheless, one of the readers of the original article has asked us whether two utility (closed-end) funds can, perhaps, make the cut.
- In this article, we're digging deep into these two funds, "pulling their guts out," in a genuine attempt to find a "diamond fund" among the "utility rough."
- Can either Reaves Utility Income and/or BlackRock Utilities, Infrastructure & Power Opportunities Trust make the cut?
- I do much more than just articles at Wheel of Fortune: Members get access to model portfolios, regular updates, a chat room, and more. Learn More »
aykutsevinc/iStock via Getty Images
Background Story
On Jan. 12, we wrote that "Utilities Have Run Out Of Energy." Exactly two weeks later, and it's safe to say the opposite too: Energy has run out of utilities...
That's true for the past two weeks, with energy (XLE) outperforming utilities (XLU) by ~6.6%.
And that's even more true YTD, with Energy outperforming Utilities by ~23.9%, a stunning spread when you think that it has happened over the course of only 16 trading days!
Y-Charts
Anyway, going back to the referenced article, it was yesterday when one of the readers asked us the following question: "Would BUI be a better choice than UTG at this juncture or is it the same can of worms as UTG?"
Instead of coming up with a short, non-committing, reply we've decided to deliver a long, very committed, answer where Reaves Utility Income (NYSE:UTG) and BlackRock Utilities, Infrastructure, & Power Opportunities Trust (NYSE:BUI) go head to head.
Key Facts / Portfolio Characteristics
Based on the data, we can see that:
- UTG is a much bigger, and older, fund than BUI
- On a total cost basis, BUI is only slightly cheaper than UTG
| Ticker | UTG | BUI |
| CUSIP | 756158101 | 09248D104 |
| Inception Date | Feb 24, 2004 | Nov 22, 2011 |
| NAV | $32.34 | $23.90 |
| Net Assets as of Jan 25, 2022: | $1,744.3M | $519.9M |
| Market Price | $32.89 | $24.49 |
| Number of Holdings as of Dec 31, 2021: | 44 | 56 |
| Management Fee | 0.70% | 1.00% |
| Gross Expense Ratio | 1.23% | 1.13% |
This isn't a section we wish to declare a winner based on, however UTG clearly has the advantage of size (3.4x BUI) and tenor (circa 18 years for UTG vs. a bit over 10 for BUI), and that is something to keep in mind.
Premium/Discount to NAV
Based on the below data we may conclude that while UTG is currently trading in-line with its past average premium, BUI is trading with a slightly lower than its normal premium.
Furthermore, from a premium/discount perspective, both funds have only ~2.2%-2.5% downside to the lowest discount they've traded at over the past year. While this, for itself, doesn't mean that the price can't go down (surely it can), it does suggest that the current valuation compared to the NAV is reasonable and within the long-term acceptable level.
Nonetheless, it does look as if BUI has more upside, based on previous maximum premium each fund has traded at compared to the current premium. For UTG this upside is only ~3% but for BUI it's circa 10%.
Reaves Utility Income (UTG), as of 1/24/2022:
| UTG | SharePrice | NAV | Premium/Discount |
|---|---|---|---|
| Current | $33.15 | $32.55 | 1.84% |
| 52 Wk Avg | $34.10 | $33.54 | 1.69% |
| 52 Wk High | $36.50 | $36.07 | 4.88% |
| 52 Wk Low | $30.50 | $29.95 | -0.63% |
(Source)
BlackRock Util, Infra & Power Opp (BUI), as of 1/24/2022:
| BUI | SharePrice | NAV | Premium/Discount |
|---|---|---|---|
| Current | $24.67 | $24.23 | 1.82% |
| 52 Wk Avg | $25.88 | $24.97 | 3.66% |
| 52 Wk High | $27.79 | $26.22 | 11.49% |
| 52 Wk Low | $23.82 | $23.05 | -0.47% |
(Source)
If we look at the Discount/Premium to NAV over a way longer time-frame, past 10 years, we can see a couple of things:
- The behavior of the two funds (on that aspect) is very similar.
- The lead is changing without one being constantly above/below the other.
- Trading at a premium is a relatively new phenomena of the past three (for UTG) - four (for BUI) years. Prior to that, both funds used to trade at a discount, occasionally deep discounts.
Y-Charts
From a price-to-NAV perspective, we call it a draw.
Having said that, investors mustn't assume that trading at a premium (to NAV) is a given. These funds know very well how trading at a discount looks like, and the fact that they've benefited from this boon in recent years doesn't mean that it will go like this forever.
Distribution Yield
Not only is UTG paying a distribution yield which is over 1% greater than that of BUI, but it has a longer, and more promising, trajectory.
| UTG | BUI | |
| Distribution Rate | 6.88% | 5.89% |
| Distribution Amount | $0.190 | $0.121 |
| Distribution Frequency | Monthly | Monthly |
Source: UTG, BUI
UTG has increased the monthly distribution ever since the fund was launched.
CEF Connect
BUI, on the other hand, has kept its distribution static for over 7.5 years now, ever since the fund shifted its distribution policy from quarterly to monthly payments.
CEF Connect
Interestingly though, it has not always been UTG on top when it comes to the higher distribution yield. As a matter of fact, BUI was the higher-paying fund during most periods.
Y-Charts
Still, UTG is ahead comfortably for more than a year now, and with its leverage (see more details about this hereinafter) that is giving it a real boost, it has the upper hand.
While we can't (and won't) say that BUI is a "bad payer", UTG is winning this battle.
Top 10 Holdings
(as of 12/31/2021)
Both funds like NextEra Energy (top holding in both), however UTG is less concentrated on this specific name, as well as on the overall weight of the top-10 holdings.
Reaves Utility Income:
| Description | % of Total Portfolio |
| NextEra Energy, Inc. (NEE) | 4.55% |
| BCE, Inc. (BCE) | 3.71% |
| Exelon Corp. (EXC) | 3.46% |
| Entergy Corp. (ETR) | 3.36% |
| Ameren Corp. (AEE) | 3.35% |
| TELUS Corp. (TU) | 3.34% |
| Alliant Energy Corp. (LNT) | 3.34% |
| American Water Works Co., Inc. (AWK) | 3.26% |
| WEC Energy Group, Inc. (WEC) | 3.24% |
| Public Service Enterprise Group, Inc. (PEG) | 3.17% |
| Total as a % of Net Assets | 34.78% |
(Source)
BlackRock Util, Infra & Power Opp:
| Name | % of Total Portfolio |
|---|---|
| NEXTERA ENERGY INC (NEE) | 8.27% |
| ENEL SPA (OTCPK:ENLAY) | 4.97% |
| RWE AG (OTCPK:RWEOY) | 3.74% |
| JOHNSON CONTROLS INTERNATIONAL PLC (JCI) | 3.14% |
| WASTE MANAGEMENT INC (WM) | 2.98% |
| IBERDROLA SA (OTCPK:IBDRY) | 2.96% |
| VINCI SA (OTCPK:VCISY) | 2.66% |
| SCHNEIDER ELECTRIC SE (OTCPK:SBGSY) | 2.63% |
| ATLAS COPCO AB (OTCPK:ATLKY)(OTCPK:ATLCY) | 2.63% |
| DOMINION ENERGY INC (D) | 2.58% |
| Total as a % of Net Assets | 36.56% |
(Source)
On the other hand, BUI is more diversified (56 vs 44 positions, as shown under the "Key Facts / Portfolio Characteristics" section) and it's clearly way more non-US oriented than UTG.
We will touch upon this under the "Country Allocation" section (hereinafter), but for us the diversification and non-US exposure makes BUI safer and more interesting compared to UTG.
Leverage and Volatility
While UTG employs over 20% leverage, BUI has none.
Leverage isn't a bad thing, especially when it's being used for a relatively safe, surely defensive, sector like Utilities, which is predominantly about income.
Therefore, we actually like the leveraged UTG more than we like the non-leveraged BUI, as under normal circumstances - the former is able to generate more income, while taking advantage of what are (still) very low financing costs.
This is probably the main reason why UTG is paying a distribution yield which is (surprise, surprise...) ~17% greater than that of BUI. That's exactly what a 20% leverage minus (financing and management) fees brings us to.
Nevertheless, leverage also has a "mirror image" in the form of volatility. Higher leverage usually translates into a higher volatility. Let's see if this is indeed the case with these two funds.
30-Day Rolling Volatility - past year:
Although the difference isn't that big (both funds are fairly steady, i.e. not volatile), it's the no-leverage BUI which is more volatile than the leveraged UTG!
Y-Charts
30-Day Rolling Volatility - past 10 years:
Over the long term, it's quite obvious 1) how low volatility is (for both funds), and 2) how they're roughly walking hand-in-hand from a volatility standpoint.
Y-Charts
In light of this, we declare UTG to be the winner of this section as the leverage does add value to its distribution yield, without this taking a toll on (higher) volatility.
Country Allocation
We've already got more than just a clue where this section is headed, based on the top-10 holdings, but here's the full picture that leaves no doubt.
UTG (data as of 9/30/2021) is basically entirely US centric, with the fund using the extra ~20%, thanks to the leverage, to invest in less than a handful of non-US countries (even then Canada, the closest "US alike country" one can find, is taking the bulk of the extra geographical exposure).
| Country | % of Total Portfolio |
| United States | 103.10% |
| Canada | 13.72% |
| Italy | 2.99% |
| Denmark | 1.69% |
(Source)
And while UTG is very US-focused, less than 60% of BUI's assets (data as of Dec 31, 2021) are North-American related.
| Country | % of Total Portfolio |
| United States | 56.19% |
| France | 6.55% |
| Italy | 6.18% |
| Germany | 4.73% |
| United Kingdom | 3.43% |
| Sweden | 3.42% |
| Portugal | 3.42% |
| Spain | 2.96% |
| Canada | 2.71% |
| China | 2.54% |
| Ireland | 2.01% |
| Denmark | 1.82% |
| Switzerland | 1.26% |
| Cash and/or Derivatives | 0.62% |
| Other | 2.17% |
(Source)
With ~41.1% of assets located outside of the US, BUI is clearly more geographically-diversified, consequently less risky at least on that front.
Sector/Industry Breakdown
UTG isn't as generous as BUI when it comes to providing data (another edge for the latter), and one has to dig into the fund's filings in order to reach the most recent data.
Based on UTG's annual report (most recent data which is currently available; below), we built the following table:
| Sector | % of Total Portfolio |
| Utilities | 65.0% |
| Communication Services | 25.8% |
| Real Estate | 21.2% |
| Industrials | 7.3% |
| Energy | 0.4% |
| Other | 1.1% |
| Total Gross Exposure (inc. Leverage) | 120.8% |
(Sources: Main source: Fund's Annual Report; Secondary sources: CEF Connect, Fund's Factsheet (end of Sep 2021))
Unlike UTG, data regarding BUI (as is the case with all BlackRock's funds) is easily accessible and up-to-date (as of Dec 31, 2021):
| Sector / Industry | % of Total Portfolio |
| Utilities | 51.81% |
| Capital Goods | 25.06% |
| Real Estate | 17.34% |
| Energy | 7.06% |
| Commercial & Professional Services | 4.96% |
| Materials | 4.51% |
| Semiconductors & Semiconductor Equipment | 3.77% |
| Tech Hardware & Equip | 2.21% |
| Cash and/or Derivatives | 0.62% |
| Total Gross Exposure (no Leverage) | 100.0% |
Overall, it looks as if UTG is a much more "pure Utility" fund than BUI.
Once again, just as is the case with the geographical allocation, BUI seems to be way more diversified than UTG, also when it comes to sector/industry allocation.
Moreover, while there's no evidence for tech/growth exposure in UTG's portfolio, there's a 6% allocation to aggressive industries at BUI. Whether this is a good or bad thing is in the eye of the beholder, but BUI (once again) is the more diversified fund of the two on that front too.
Performance
Last but not least, what's to many the most important battleground of them all - performance.
Interestingly and surprisingly, although we saw that BUI is more volatile over the past year, its drawdowns are consistently smaller than those of UTG.
Looking at the past 10 years, it's easy to see that the blue line (of BUI) is almost always higher than the orange line (of UTG), especially over the past 4.5 years.
Y-Charts
As for the two funds' total returns:
Over the past year, UTG has outperformed by (what's) a significant percentage point. While 6.24% may not seem like a big number, it actually is when we talk of funds that are returning no more than 10% per annum.
Y-Charts
Nevertheless, when looking at the past 10 years, the race is way tighter. The two funds have practically delivered an identical total return to their shareholders.
153% over the past decade is about 9.7% CAGR (of return); not bad for any fund, especially not for a solid, defensive, utility fund.
Y-Charts
Verdict
Frankly, these are two fine, well-managed, funds.
Morningstar is giving BUI and UTG a 5- and 4- star rating, respectively. This allegedly suggests that BUI is the better fund, but for us (regardless of rating) this is a much tighter race than a 1-star difference implies.
UTG has the upper hand when it comes to size, seniority, distribution trajectory, distribution yield, and we would also add leverage (that assists greatly to the distribution yield).
For whatever it's worth, UTG has also performed better over the past year, although based on the long-run track records the two funds are essentially very similar species.
BUI has the upper hand when it comes to number of positions, geographical diversification, sector/industry diversification, and (while it's not a major thing) the potential upside from a maximum premium/NAV perspective.
As you already know, we believe that:
1) Macro Trumps Micro. This means that no matter how good or bad a specific/single name/company is, the overall market would dictate much of its move, up or down, regardless of its own merits.
2) Current Macro doesn't bode well for Utilities. Simply put, during a tightening cycle, let alone one that is combined with the peak of a business cycle, yield-oriented securities don't tend to perform too well.
See for yourself (using the chart below): When yields (UST10Y in this case) go UP significantly over a (relatively) short period of time - the correlation between Utilities to UST10Y is dropping fast and deep into INVERSE levels.
Y-Charts
Although the short-end of the yield-curve is running up way faster than the long-end*, it doesn't mean that the latter is standing still.
*Note the below chart is measuring the % of change to Us Treasury rates over the past 6 months.
Sure thing, the yield-curve keeps flattening, suggesting that a recession may not be that far ahead, but that's another story for another time.
For the sake of this article, what we end up with is a combination of higher (nominal) rates/yields, higher inflation, lower/slowing economic growth, and a market which regardless of anything else is anything but cheap.
Can Utilities (as a whole) avoid this lethal combination? We already wrote two weeks ago that we strongly doubt it (which is a nice way to avoid giving a straight NO...).
Perhaps UTG and/or BUI can avoid this lethal combination? As much as we don't dislike these funds, we have to come up with the exact same answer.
After all, neither UTG nor BUI has proven themselves to be any better than XLU, over time.
Taking into consideration that we gave XLU a "SELL" rating two weeks ago, we have no choice but to give both UTG and BUI a "SELL" rating too; nothing to do with the micro, and everything to do with macro.
Because at the end of the day, macro trumps micro, and a "lethal combination" - just as the one we're currently facing - certainly trumps the good intentions/fundamentals of even the most solid, defensive, sector out there.
At the end of a rough day, we've hopefully written a "diamond article", but we've certainly found no "diamond fund" among the "utility rough."
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The Fortune Teller ("TFT") is a well-known contributor on Seeking Alpha ("SA"), and a top blogger according to TipRanks, with over 30 years of deep and direct market experience.
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On a more personal note...
We're advising and consulting to private individuals, mostly (U)HNWI that we had been serving through many years of working within the private banking, wealth management and asset management arenas. This activity focuses on the long run and it's mostly based on a Buy & Hold strategy.
Risk management is part of our DNA and while we normally take LONG-naked positions, we play defense too, by occasionally hedging our positions, in order to protect the downside.
We cover all asset-classes by mostly focusing on cash cows and high dividend paying "machines" that may generate high (total) returns: Interest-sensitive, income-generating, instruments, e.g. Bonds, REITs, BDCs, Preferred Shares, MLPs, etc. combined with a variety of high-risk, growth and value stocks.
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