Hennessy: Profits from Gas

06/20/2014 9:00 am EST

Focus: FUNDS

Mark Salzinger

Editor and Publisher, The No-Load Fund Investor

Among the funds we track, one of the best performers has been a gas utility fund; it has done well lately, in part, because investors have turned to steady, yield-oriented investments, explains Mark Salzinger, editor of No-Load Fund Investor.

Hennessy Gas Utility Index Fund (GASFX:US) tracks the total return of the AGA Stock Index, maintained by the American Gas Association, the members of which process and distribute natural gas.

The fund has positions in all of the publicly traded companies that are members of the association, including some foreign companies (mainly Canadian) that conduct a lot of business in the US.

The portfolio is weighted by market capitalization but adjusted for the percentage of natural gas assets on each company's balance sheet. No stock represents more than 5% of assets.

GASFX includes 64 holdings, with a median price/earnings ratio of 18.6 and a median market capitalization of $6.1 billion. US stocks account for about 84% of assets.

Utilities companies account for about two thirds of assets, including pure electric (6.4%), gas (19.5%), and diversified utilities (37.3%). Oil and gas storage and transportation companies account for the remaining third.

Over the long run, however, GASFX has outperformed the broad utility sector. Equally impressive, price volatility of the GASFX and the broad utility sector has been about the same, so the return per unit of risk of GASFX has been far superior.

The biggest risks to the fund's continued strong performance are economic; and especially regulatory/environmental; if fracking were determined to be environmentally unacceptable, the fund would suffer as new regulations limited the practice.

GASFX pays dividends quarterly at an annual rate of a little more than 2.0%. However, many of its constituents offer considerably higher yields and would therefore likely suffer some in a rising rate environment.

Therefore, its shareholders should be prepared for a modest increase in volatility if, and when, interest rates reverse course from their current, downward trajectory.

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