Uncertainty is plentiful in today’s financial world, as investors try to sort out a reasonably strong economy, historically high inflation, war in Ukraine, and aggressive Federal Reserve monetary policy, asserts Brian Kelly, editor of MoneyLetter.
Unfortunately, the increased uncertainty has resulted in above-normal volatility in the stock and bond markets this year. Price pressure on mutual funds and ETFs of almost every type has necessitated a close review of all our positions. We have identified an opportunity among our Specialty holdings to help improve performance going forward.
For conservative investors (or those looking for a conservative sleeve) we are establishing a position in utilities. Utilities funds are used as a defensive investment, providing a combination of capital appreciation and dividend yield with a lesser risk profile than a typical growth or value domestic stock fund.
Dividends from utility companies often outyield other fixed-income investments, and utilities tend to be very resistant to economic cycles. This is because demand for utilities does not change much compared with most other industries, even in economic hard times.
We sold some of our balanced fund positions in all three of our Conservative model portfolios to fund the Utility position. Removing balanced funds makes some sense on its own merits, as we can replicate those funds’ allocations with our own commitments to stock and bond funds.
Fidelity Select Utilities (FSUTX) is considerably less risky than the market, showing a beta of 0.69 (11/30/22). This reflects the steady demand that we described above. Of course, changes in government regulations, fuel prices, the cost of financing, natural resource conservation, and more could affect the attractiveness of the underlying stocks.
The fund held approximately 72% in electric utilities as of October 31, the most recent data available. It held less than one percent in oil & gas storage and transportation. Here are the top five holdings: NextEra Energy (NEE), Southern Company (SO), Constellation Energy (CEG), Sempra Energy (SRE) and Exelon Corp. (EXC).
Fidelity Select Utilities — a large cap value fund — has had a 2022 YTD return (through 12/7/22) of 5.1%. In comparison, the Vanguard 500 Index ETF (VOO) had a YTD loss of 16.3%. The fund's 10-year annualized return is 11.3%.