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ôThis has only been partly due to good share performance,ö he says. ôUtilities is seen as a very defensive sector. With economic indicators in the US such as house prices on a downward trend we have seen the utilities become more in focus among the general public as a defensive investment.ö
A key feature of utilities companies û that their profits tend to rise with inflation while other areas of the economy tend to be negatively impacted by it û makes the sector an attractive investment. ôIt is seen as a very strong sector with a good dividend yield,ö says Zandbergen. ôIn that sense it is easy to make a comparison with bonds but as interest rates rise bonds go down and in the past this has had some impact on utilities companies but the correlation is becoming less apparent.ö
This has not gone noticed among large institutions, he says, with company pension funds seeking to match their liabilities, particularly in Europe, and as such looking to buy inflation-proofed investments by buying into or actually purchasing whole utilities companies via the private equity route. Zandbergen says many institutions are willing to pay a premium for utilities companies, in some cases as much as 25% to the asset base. ôIn the UK, utility revenues have historically grown with inflation and these companies are attracted by a return-on-equity of 10% a year,ö he adds.
Inter-industry M&A activity will also continue to drive sector performance, according to Zandbergen. ôM&A is dispersed across the global utilities market,ö he says. ôMost utilities companies do not want to invest out of their sphere of expertise. They did that buying technology companies a few years ago and have learned from that mistake.ö
The latest big deal in the utilities industry was the takeover of the UKÆs Thames Water by Macquarie Bank, and market whispers have suggested that United Utilities, another UK company, is also in the takeover frame.
There has been a trend of utilities companies returning money to shareholders in the last few years, through share buy-backs and in some cases issuing special dividends, and this is set to continue according to Zandbergen, as they are not yet willing to spend their profits on investing in production infrastructure. This is particularly true of electricity companies because of their symbiotic relationship with the oil price.
ôThe general consensus has oil at $65 per barrel this year and $60 next and this is already priced into the utilities market,ö he explains. ôIt is difficult to see further than this but some brokers reckon around $50 per barrel in subsequent years with a relative cost per kilowatt hour of electricity of roughly Ç50 in Europe. They have not yet started to build new facilities because Ç50kwh is seen as too low. A lot of companies are talking about investment in plants and machinery but this will take three years to come through.ö
The ABN AMRO Global Utilities fund has returned 102.3% over three years to the end of September 2006, compared to the S&P Offshore & International Funds Utilities sector mean of 100.2%. It ranks third out of 10 funds in the sector (at 29 September, bid-to-bid, according to Standard & PoorÆs).
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