Utilities - worth another look?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
User avatar
patrick013
Posts: 2929
Joined: Mon Jul 13, 2015 7:49 pm

Re: Utilities - worth another look?

Post by patrick013 » Tue Dec 31, 2019 4:08 pm

Investment advisors have long touted utilities as a defensive investment. They do keep up with the market portfolio with much lower price beta. Helpful when withdrawals are needed. Drawing regression lines thru multiple variables models variable relationships and predicts an outcome or estimate but a picture tells the whole story well. Of course only the better companies selected for the indexes. Yields higher than bonds and good LTCG's the last business cycle. Not alot to be discouraged about for a 10% tilt or so. Except an earthquake I suppose.

Image
age in bonds, buy-and-hold, 10 year business cycle

User avatar
siamond
Posts: 5445
Joined: Mon May 28, 2012 5:50 am

Re: Utilities - worth another look?

Post by siamond » Tue Dec 31, 2019 4:53 pm

HEDGEFUNDIE wrote:
Sat Mar 16, 2019 12:49 pm
In general, I am on board with Bogleheads’ general admonition not to pick sectors.

However, over the past 20 years, utilities have offered the least correlation to TSM of any sector (.55) with similar returns (7% CAGR).
20 years is a terribly short period of time to reach any conclusion... Notably with sectors (which tend to come and go, not year over year, but decade over decade) and with a moody metric like correlation.

OP, did you take a good look at Fidelity Select Utilities (FSUTX)? This would add 10 more years to your backtest. I took a brief look, it didn't seem terribly exciting to me, but maybe you'll see more to it.

There was an excellent article in one of the credit suisse global investment returns yearbooks about sectors being studied over a much longer period of time. Can't remember which year though, nor details, except that it reinforced my view that sector investing is a crap shot full of recency bias issues.

This being said, I do understand your desire to diversify away from where you and your spouse work... And I don't have a good answer beyond what you're already doing.

User avatar
Uncorrelated
Posts: 753
Joined: Sun Oct 13, 2019 3:16 pm

Re: Utilities - worth another look?

Post by Uncorrelated » Wed Jan 01, 2020 5:07 am

HEDGEFUNDIE wrote:
Tue Dec 31, 2019 10:47 am
Idiosyncratic risk by definition is reduced when you hold more uncorrelated holdings. That's how the market portfolio does its magic, by smoothing out all of the idiosyncrasies.

How does holding Pepsi reduce the idiosyncratic risk of holding Coke? If people decide to drink less sugar both will be impacted.
You already hold the maximum amount of uncorrelated holdings. It's called VTI. Tacking on additional idiosyncratic risk in the form of sector overweights does nothing good unless the ideosyncratic risk of the sector you are over-weighting is negatively correlated with the idiosyncratic risk of your company.

Supposedly, Pepsi has negative correlation with coca cola. If Pepsi becomes less popular Coca-cola can sell more beverages due to lower competition. Of course this doesn't reduce sector specific risks such as lower beverages consumption in general. If you hold a large Pepsi allocaton, then the thing you're most uncompensated for is left tail risk. But if left tail risk hits pepsi, coca cola might be likely to do good.

What does the utility sector gain when left tail risk hits your company? What companies are most likely to benefit when your company hits the dust? Those might be good prospect for buying. Low correlation in itself doesn't mean it's a good buy.
nullisland wrote:
Tue Dec 31, 2019 1:06 pm
1. How do you best diversify a portfolio that's heavily tilted toward market beta, but doesn't otherwise have significant idiosyncratic risk?
The best way to reduce risk from a portfolio that is heavily tilted toward market beta is to sell the portfolio and start over.

The question formulation seems faulty. One does not want to tilt away from market beta. One wants to maximize the return at some acceptable leel of risk. Tilting away from market beta is a roundabout way to think about that goal. Technically, buying long term corporate bonds tacks on various sources of risk thus your portfolio becomes more diversified across factors, but because you are poorly compensated for corporate bonds it will only make your portfolio worse.

All of the factors are equally suited to tilt away from market beta, there is no specific reason why bet against beta would be better than size or value.
2. How do you most efficiently diversify a portfolio with significant idiosyncratic single-stock risk?

This is the particular situation Hedgfundie finds himself in. This is a really interesting optimization problem! Sounds a little like a mini version of what some quant hedge funds do. Tilting toward the least-correlated sector makes intuitive sense to me here, but I don't know how you'd go about measuring this more objectively.

I don't know if a utility tilt makes sense for most people with typical Boglehead-style portfolios, but for tech employees with significant stock-based compensation it could be a good idea.

If someone figures out a more rigorous, generic solution to this problem of RSU risk I bet you could do pretty well as an investment advisor in silicon valley.
You can get quite far by applying an option pricing model combined with mean variance optimization. RSU's are technically options.

I don't see how tilting to the most uncorrelated sector is going to do anything useful in this situation. That is just a recipe to tilt to the narrowest sector since high idiosyncratic risk results in low correlation. If you do that you are only adding risk to your portfolio instead of decreasing it.

moptop
Posts: 24
Joined: Mon May 07, 2018 8:11 pm

Re: Utilities - worth another look?

Post by moptop » Wed Jan 01, 2020 3:03 pm

What about using EDV instead of utilities or REITS? It seems like it could provide more equity like risk and return with little correlation to the market. I guess it would be considering edv a slice of your equities rather than bonds. If this was a really dumb idea let me know...

User avatar
watchnerd
Posts: 5981
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Utilities - worth another look?

Post by watchnerd » Wed Jan 01, 2020 5:02 pm

moptop wrote:
Wed Jan 01, 2020 3:03 pm
What about using EDV instead of utilities or REITS? It seems like it could provide more equity like risk and return with little correlation to the market. I guess it would be considering edv a slice of your equities rather than bonds. If this was a really dumb idea let me know...
Or split the difference with EM bonds.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

Topic Author
HEDGEFUNDIE
Posts: 4801
Joined: Sun Oct 22, 2017 2:06 pm

Re: Utilities - worth another look?

Post by HEDGEFUNDIE » Wed Jan 01, 2020 5:21 pm

moptop wrote:
Wed Jan 01, 2020 3:03 pm
What about using EDV instead of utilities or REITS? It seems like it could provide more equity like risk and return with little correlation to the market. I guess it would be considering edv a slice of your equities rather than bonds. If this was a really dumb idea let me know...
All of my bonds are already in EDV - my AA is 80/20. I'm trying to further diversify the 80.

moptop
Posts: 24
Joined: Mon May 07, 2018 8:11 pm

Re: Utilities - worth another look?

Post by moptop » Wed Jan 01, 2020 6:08 pm

HEDGEFUNDIE wrote:
Wed Jan 01, 2020 5:21 pm
moptop wrote:
Wed Jan 01, 2020 3:03 pm
What about using EDV instead of utilities or REITS? It seems like it could provide more equity like risk and return with little correlation to the market. I guess it would be considering edv a slice of your equities rather than bonds. If this was a really dumb idea let me know...
All of my bonds are already in EDV - my AA is 80/20. I'm trying to further diversify the 80.

Okay. Say for someone with a more traditional 80/20 with more conventional bonds, do you think adding 10% edv instead of REITS (or utilities) could be of benefit. Basically considering EDV as equities for this purpose.

I currently hold 10% REITs and am now reconsidering that choice.

Topic Author
HEDGEFUNDIE
Posts: 4801
Joined: Sun Oct 22, 2017 2:06 pm

Re: Utilities - worth another look?

Post by HEDGEFUNDIE » Wed Jan 01, 2020 6:11 pm

moptop wrote:
Wed Jan 01, 2020 6:08 pm
HEDGEFUNDIE wrote:
Wed Jan 01, 2020 5:21 pm
moptop wrote:
Wed Jan 01, 2020 3:03 pm
What about using EDV instead of utilities or REITS? It seems like it could provide more equity like risk and return with little correlation to the market. I guess it would be considering edv a slice of your equities rather than bonds. If this was a really dumb idea let me know...
All of my bonds are already in EDV - my AA is 80/20. I'm trying to further diversify the 80.

Okay. Say for someone with a more traditional 80/20 with more conventional bonds, do you think adding 10% edv instead of REITS (or utilities) could be of benefit. Basically considering EDV as equities for this purpose.

I currently hold 10% REITs and am now reconsidering that choice.
I don't think anyone should consider EDV as equities - they are negatively correlated to equity. You should consider them [highly volatile] bonds.

And yes, I would always encourage people to extend their bond duration before doing anything unorthodox with their equities.

User avatar
Carlos Danger
Posts: 155
Joined: Fri Mar 16, 2018 6:32 pm

Re: Utilities - worth another look?

Post by Carlos Danger » Wed Jan 01, 2020 6:27 pm

siamond wrote:
Tue Dec 31, 2019 4:53 pm

20 years is a terribly short period of time to reach any conclusion... Notably with sectors (which tend to come and go, not year over year, but decade over decade) and with a moody metric like correlation.

OP, did you take a good look at Fidelity Select Utilities (FSUTX)? This would add 10 more years to your backtest. I took a brief look, it didn't seem terribly exciting to me, but maybe you'll see more to it.
9.5% rate of return vs. 10% rate of return for the S&P 500 assuming equal monthly contributions from January of 1985 through Deecember of 2019, with a correlation to the U.S. stock market of 0.66. Seems very exciting to me. VPU doesn't go as far back, but during it's lifetime it has been even less correlated with the U.S. stock market than FSUTX (.48 vs. .56 from Feb. 2004 through Dec. 2019)

Since its inception, VPU, assuming equal monthly contributions, has returned 10.61% vs. 11.06% for the S&P 500 to go along with that correlation of .48

User avatar
watchnerd
Posts: 5981
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Utilities - worth another look?

Post by watchnerd » Wed Jan 01, 2020 6:42 pm

moptop wrote:
Wed Jan 01, 2020 6:08 pm

Okay. Say for someone with a more traditional 80/20 with more conventional bonds, do you think adding 10% edv instead of REITS (or utilities) could be of benefit. Basically considering EDV as equities for this purpose.

I currently hold 10% REITs and am now reconsidering that choice.

Long term treasuries have low to negative correlation with stocks.

REITs have positive correlation with stocks, although lower than many other stocks.

Moving to 70/30, with an allocation to EDV, while reduce your equity risk exposure but increase your interest rate risk exposure. It will probably also shave a little off your CAGR, but reduce your lowest lows in market crashes.

Note: most BHers do not like long treasuries. So if you're not confident in your reasons to hold them, you will continually be questioned.

Full disclosure: I'm 70/30, with 50% of bonds allocated to long term treasuries. These are barbelled with short term TIPS.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

smectym
Posts: 845
Joined: Thu May 26, 2011 5:07 pm

Re: Utilities - worth another look?

Post by smectym » Wed Jan 01, 2020 7:03 pm

D-Dog wrote:
Wed Jun 19, 2019 6:21 am
vineviz wrote:
Tue Jun 18, 2019 3:01 pm
aristotelian wrote:
Tue Jun 18, 2019 2:24 pm


>>"What if instead of VPU (utilities etf) we used one utility stock."

I actually am living this, or my portfolio is, bc I started a humble old-fashioned DRIP with Duke Energy years ago and, with all those DCA investments and dividend raises and so on, it did what I suppose all DRIP investments are designed to eventually do, and it's now a six-figure holding. I know I should sell it in order not to continue committing the sin of owning any individual stock, but instead the holding keeps growing, Duke keeps raising the dividend, and I haven't turned off auto-invest yet.

Topic Author
HEDGEFUNDIE
Posts: 4801
Joined: Sun Oct 22, 2017 2:06 pm

Re: Utilities - worth another look?

Post by HEDGEFUNDIE » Wed Jan 01, 2020 7:05 pm

Carlos Danger wrote:
Wed Jan 01, 2020 6:27 pm
siamond wrote:
Tue Dec 31, 2019 4:53 pm

20 years is a terribly short period of time to reach any conclusion... Notably with sectors (which tend to come and go, not year over year, but decade over decade) and with a moody metric like correlation.

OP, did you take a good look at Fidelity Select Utilities (FSUTX)? This would add 10 more years to your backtest. I took a brief look, it didn't seem terribly exciting to me, but maybe you'll see more to it.
9.5% rate of return vs. 10% rate of return for the S&P 500 assuming equal monthly contributions from January of 1985 through Deecember of 2019, with a correlation to the U.S. stock market of 0.66. Seems very exciting to me. VPU doesn't go as far back, but during it's lifetime it has been even less correlated with the U.S. stock market than FSUTX (.48 vs. .56 from Feb. 2004 through Dec. 2019)

Since its inception, VPU, assuming equal monthly contributions, has returned 10.61% vs. 11.06% for the S&P 500 to go along with that correlation of .48
Man, this is what I've been saying all along! Who wouldn't be enticed by that?

smectym
Posts: 845
Joined: Thu May 26, 2011 5:07 pm

Re: Utilities - worth another look?

Post by smectym » Wed Jan 01, 2020 7:08 pm

watchnerd wrote:
Wed Jan 01, 2020 6:42 pm
moptop wrote:
Wed Jan 01, 2020 6:08 pm


>>Note: most BHers do not like long treasuries. So if you're not confident in your reasons to hold them, you will continually be questioned.
Full disclosure: I'm 70/30, with 50% of bonds allocated to long term treasuries. These are barbelled with short term TIPS.

What's the boglehead dictum vs. long treasuries, I missed that one. Rhetorical question, of course I should and will go look it up myself. But "long long term treasuries" has been a pretty good trade for the last 30+ years.

User avatar
watchnerd
Posts: 5981
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Utilities - worth another look?

Post by watchnerd » Wed Jan 01, 2020 7:17 pm

smectym wrote:
Wed Jan 01, 2020 7:08 pm



What's the boglehead dictum vs. long treasuries, I missed that one. Rhetorical question, of course I should and will go look it up myself. But "long long term treasuries" has been a pretty good trade for the last 30+ years.
BHers tend not to like long treasuries (and even more so for long long) because:

--Concerns that past results were the result of the secular decades long draw down of interest rates that, at some unknown date in the future, will unwind and go back up

--The inventory of long treasuries with juicy rates will eventually age out of funds as the bonds are redeemed

--The yield spread is too shallow, and thus the extra return to0 low, to make the extra duration risk worth it

--The 'flight to safety' benefits during stock declines are spreading to other Treasuries, so why go long?

--Duration is higher than TBM, and is therefore not market weight

I'm sure there are more, and if you site search on "long treasury" you'll find lots more debate.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

Topic Author
HEDGEFUNDIE
Posts: 4801
Joined: Sun Oct 22, 2017 2:06 pm

Re: Utilities - worth another look?

Post by HEDGEFUNDIE » Wed Jan 01, 2020 11:12 pm

watchnerd wrote:
Wed Jan 01, 2020 7:17 pm
smectym wrote:
Wed Jan 01, 2020 7:08 pm



What's the boglehead dictum vs. long treasuries, I missed that one. Rhetorical question, of course I should and will go look it up myself. But "long long term treasuries" has been a pretty good trade for the last 30+ years.
BHers tend not to like long treasuries (and even more so for long long) because:

--Concerns that past results were the result of the secular decades long draw down of interest rates that, at some unknown date in the future, will unwind and go back up

--The inventory of long treasuries with juicy rates will eventually age out of funds as the bonds are redeemed

--The yield spread is too shallow, and thus the extra return to0 low, to make the extra duration risk worth it

--The 'flight to safety' benefits during stock declines are spreading to other Treasuries, so why go long?

--Duration is higher than TBM, and is therefore not market weight

I'm sure there are more, and if you site search on "long treasury" you'll find lots more debate.
I've probably been involved in the most Long Treasuries battles on Bogleheads - I think the fundamental issue the typical BH has with Long Treasuries is the volatility. They believe volatility belongs to equities, period. "Take your risk on the equity side" they say. Nevermind the fact that portfolio volatility is what matters, and that LTTs are the best cure for that.

User avatar
watchnerd
Posts: 5981
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Utilities - worth another look?

Post by watchnerd » Wed Jan 01, 2020 11:18 pm

HEDGEFUNDIE wrote:
Wed Jan 01, 2020 11:12 pm

I've probably been involved in the most Long Treasuries battles on Bogleheads - I think the fundamental issue the typical BH has with Long Treasuries is the volatility. They believe volatility belongs to equities, period. "Take your risk on the equity side" they say. Nevermind the fact that portfolio volatility is what matters, and that LTTs are the best cure for that.
I hear you on that.

But MPT/MVO or even much talk about correlations gets short-shrift compared to the "keep it simple" mantra.

I *want* the long end of my bond barbell to be volatile.

The short end is my stable end.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

financeperchance
Posts: 256
Joined: Thu Nov 02, 2017 11:15 am

Re: Utilities - worth another look?

Post by financeperchance » Thu Jan 02, 2020 9:33 am

Four pages of replies here, and I'm sorry but I don't know why no one has pointed out the returns of utilities before 2000, which were crushed by the S&P 500. So much of this seems like recency bias. It's a sector that's been generally up and to the right for two decades, in which people sought dividend yields following the tech crash, and anything that's been coming out of a very long secular bull market -- whether it's utilities or long-term treasuries today, or tech stocks in 1999 -- will obviously look like a good "diversifier" on measurements like sortino ratios or whatever.

Going forward, the electrical utility industry is increasingly facing disruption by rooftop solar, and regulatory risk from state legislatures (see California and PG&E for example) -- and Jim Chanos and others have pointed out that there's not a lot of free cash flow in the industry as it is, because of very high capital expenditure requirements to maintain the electrical grids.

I just own the entire stock market, capture the wisdom of crowds, and don't worry about it.

User avatar
Forester
Posts: 1295
Joined: Sat Jan 19, 2019 2:50 pm
Location: UK

Re: Utilities - worth another look?

Post by Forester » Thu Jan 02, 2020 9:45 am

OP could achieve the same thing with the S&P 100 low vol or MSCI min vol, and diversify across sectors.

User avatar
Carlos Danger
Posts: 155
Joined: Fri Mar 16, 2018 6:32 pm

Re: Utilities - worth another look?

Post by Carlos Danger » Thu Jan 02, 2020 12:51 pm

HEDGEFUNDIE wrote:
Wed Jan 01, 2020 11:12 pm
watchnerd wrote:
Wed Jan 01, 2020 7:17 pm
smectym wrote:
Wed Jan 01, 2020 7:08 pm



What's the boglehead dictum vs. long treasuries, I missed that one. Rhetorical question, of course I should and will go look it up myself. But "long long term treasuries" has been a pretty good trade for the last 30+ years.
BHers tend not to like long treasuries (and even more so for long long) because:

--Concerns that past results were the result of the secular decades long draw down of interest rates that, at some unknown date in the future, will unwind and go back up

--The inventory of long treasuries with juicy rates will eventually age out of funds as the bonds are redeemed

--The yield spread is too shallow, and thus the extra return to0 low, to make the extra duration risk worth it

--The 'flight to safety' benefits during stock declines are spreading to other Treasuries, so why go long?

--Duration is higher than TBM, and is therefore not market weight

I'm sure there are more, and if you site search on "long treasury" you'll find lots more debate.
I've probably been involved in the most Long Treasuries battles on Bogleheads - I think the fundamental issue the typical BH has with Long Treasuries is the volatility. They believe volatility belongs to equities, period. "Take your risk on the equity side" they say. Nevermind the fact that portfolio volatility is what matters, and that LTTs are the best cure for that.
Count me as an ally in the long-term treasuries battle.

They're fantastic.

The longer the better. I don't even bother anymore with the most popular/liquid fund, TLT. Not long enough. EDV is where it's at.

User avatar
Carlos Danger
Posts: 155
Joined: Fri Mar 16, 2018 6:32 pm

Re: Utilities - worth another look?

Post by Carlos Danger » Thu Jan 02, 2020 12:56 pm

financeperchance wrote:
Thu Jan 02, 2020 9:33 am
Four pages of replies here, and I'm sorry but I don't know why no one has pointed out the returns of utilities before 2000, which were crushed by the S&P 500.
In what time period before 2000?

From Jan. of 1985 through Dec. of 1999, assuming equal monthly contributions, Fidelity Select Utilites enjoyed a rate of return of 18.52% vs. 18.9% for the S&P 500, with a U.S. market correlation of 0.68

I'd hardly call that "crushed." Giving up a mere 0.38% rate of return over that time period for the low correlation with the U.S. market seems like a good deal to me. Much higher Sharpe and Sortino ratios as well.

https://www.portfoliovisualizer.com/bac ... bol3=VUSTX

james22
Posts: 1698
Joined: Tue Aug 21, 2007 2:22 pm

Re: Utilities - worth another look?

Post by james22 » Wed Jan 08, 2020 7:44 am

Just posted in the All-Seasons thread:
james22 wrote:
Wed Jan 08, 2020 7:39 am
GMO argues for resource equities over commodities:

https://www.gmo.com/americas/research-l ... ould-love/

Anyone considering substituting Energy for commodities?
Since I am, wondering how Energy and Utilities interact.

Since 2004, VGELX and VUIAX have a correlation of only .39, but wonder if they might be subject to the same substitution threats (solar, batteries, etc.)?

Thoughts?

james22
Posts: 1698
Joined: Tue Aug 21, 2007 2:22 pm

Re: Utilities - worth another look?

Post by james22 » Mon Jan 13, 2020 5:46 am

Utilities long have been perceived as a defensive sector, offering investors relatively attractive dividend yields but little or no earnings growth. Those industry dynamics are changing, however, and the conventional view is outdated. In fact, we believe utilities now may provide some of the most favorable long‑term, risk‑adjusted return opportunities of any U.S. equity sector.

https://www.troweprice.com/institutiona ... or-na.html

james22
Posts: 1698
Joined: Tue Aug 21, 2007 2:22 pm

Re: Utilities - worth another look?

Post by james22 » Mon Jan 13, 2020 5:49 am

Seems utilities benefit from the alternatives that might hurt the Energy sector.

Nicely complementary, then.

james22
Posts: 1698
Joined: Tue Aug 21, 2007 2:22 pm

Re: Utilities - worth another look?

Post by james22 » Thu Jan 30, 2020 12:59 am

• The S&P utilities sector (NYSEARCA:XLU) has climbed 6.1% so far in January, on pace for its best month since June 2016 and outperforming every other sector, including technology, which has gained 5.9% this month.

• Energy is the S&P 500's worst performing sector, tumbling 9.1% as the Chinese coronavirus outbreak sparks concerns that it could weigh on global economic growth.


https://seekingalpha.com/news/3536120-u ... irus-fears

User avatar
Forester
Posts: 1295
Joined: Sat Jan 19, 2019 2:50 pm
Location: UK

Re: Utilities - worth another look?

Post by Forester » Thu Jan 30, 2020 8:03 am

I doubt there is a good reason to own a Utility ETF versus SPLV... SPLV is a better way to get low vol which is the main muscle movement of utilities vs the wider market.

https://www.portfoliovisualizer.com/ba ... ion2_2=100

User avatar
Schlabba
Posts: 539
Joined: Sat May 11, 2019 9:14 am
Location: Netherlands

Re: Utilities - worth another look?

Post by Schlabba » Fri Jan 31, 2020 4:03 am

OP,

Instead of utilities, did you consider a dividend fund? It seems that dividends are more stable than regular market volatility: https://awealthofcommonsense.com/2018/0 ... nd-yields/

Maybe the low correlation of utilities with TSM is explained by the dividend based returns?
Secretly a dividend investor. Feel free to ask why.

Topic Author
HEDGEFUNDIE
Posts: 4801
Joined: Sun Oct 22, 2017 2:06 pm

Re: Utilities - worth another look?

Post by HEDGEFUNDIE » Wed Mar 11, 2020 9:29 pm

A quick check in on how utilities have performed for me over the past month of volatility.

My company stock is down 30% over the past month, cutting my compensation by 10%.

S&P 500 is down by 19%

Utilities are down by only 13% over the same time period.

My strategy appears to be working...

User avatar
Starchild
Posts: 137
Joined: Fri Feb 09, 2018 9:01 am

Re: Utilities - worth another look?

Post by Starchild » Wed Mar 11, 2020 11:03 pm

HEDGEFUNDIE wrote:
Wed Mar 11, 2020 9:29 pm
A quick check in on how utilities have performed for me over the past month of volatility.

My company stock is down 30% over the past month, cutting my compensation by 10%.

S&P 500 is down by 19%

Utilities are down by only 13% over the same time period.

My strategy appears to be working...
I'm loaded in utilities. Been working for me, esp now. Being where bonds are and their yields, utilities could be a good alternative for income seekers.

james22
Posts: 1698
Joined: Tue Aug 21, 2007 2:22 pm

Re: Utilities - worth another look?

Post by james22 » Thu Mar 12, 2020 1:45 am

VUIAX is only 15% off its February high.

I'll not consider until off at least 20%, maybe 25%.

User avatar
vineviz
Posts: 6795
Joined: Tue May 15, 2018 1:55 pm

Re: Utilities - worth another look?

Post by vineviz » Thu Mar 12, 2020 6:57 am

Carlos Danger wrote:
Thu Jan 02, 2020 12:56 pm
financeperchance wrote:
Thu Jan 02, 2020 9:33 am
Four pages of replies here, and I'm sorry but I don't know why no one has pointed out the returns of utilities before 2000, which were crushed by the S&P 500.
In what time period before 2000?

From Jan. of 1985 through Dec. of 1999, assuming equal monthly contributions, Fidelity Select Utilites enjoyed a rate of return of 18.52% vs. 18.9% for the S&P 500, with a U.S. market correlation of 0.68

I'd hardly call that "crushed." Giving up a mere 0.38% rate of return over that time period for the low correlation with the U.S. market seems like a good deal to me. Much higher Sharpe and Sortino ratios as well.

https://www.portfoliovisualizer.com/bac ... bol3=VUSTX
It's not (explicitly) an index fund, but Franklin Utilities Fund (FKUTX) has tracked the index pretty well and has an inception date of 9/30/1948 and PortfolioVisualizer has daily data for the fund back to 1972. As such, I've found FKUTX to be a good proxy for backtesting the effect of including a dedicated allocation to a portfolio.

Compare two portfolios. Portfolio 1 is 100% Vanguard 500 Index Investor (VFINX). Portfolio 2 is 80% VFINX and 20% Franklin Utilities A1 (FKUTX), rebalanced annually.

Image

It's not a screamingly large effect but from 1976 (inception of VFINX) to present even a 20% allocation produced modestly higher returns, lower volatility, smaller drawdowns, and higher SWR.

With funds like Fidelity MSCI Utilities ETF (FUTY) & Vanguard Utilities ETF (VPU) at 10bps or less, the cost of this improved diversification isn't very high.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

User avatar
abuss368
Posts: 20128
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: Utilities - worth another look?

Post by abuss368 » Thu Mar 12, 2020 7:15 am

HEDGEFUNDIE wrote:
Sat Mar 16, 2019 12:49 pm
In general, I am on board with Bogleheads’ general admonition not to pick sectors.

However, over the past 20 years, utilities have offered the least correlation to TSM of any sector (.55) with similar returns (7% CAGR).

https://www.portfoliovisualizer.com/bac ... tion3_3=50

50/50 TSM/Utilites appears to offer better diversification and risk adjusted returns than 100% TSM.

Should we be considering utilities as an independent asset class, similar to how REITs have been viewed in the past?
Interesting observation. While I think a 50% of equity allocation may be too much to have in one sector (or industry), if you are trying to increase the dividend income to your portfolio there could be an argument based on your individual circumstances.

Jack Bogle has said that most investors could go their lifetime without a sector fund. That said, typically real estate (i.e. REITs) are often debated if they are a sector fund or a separate asset class.

Are you looking to increase dividend income?
John C. Bogle: Two Fund Portfolio - Total Stock & Total Bond - “Simplicity is the master key to financial success."

User avatar
Uncorrelated
Posts: 753
Joined: Sun Oct 13, 2019 3:16 pm

Re: Utilities - worth another look?

Post by Uncorrelated » Thu Mar 12, 2020 7:29 am

vineviz wrote:
Thu Mar 12, 2020 6:57 am
Carlos Danger wrote:
Thu Jan 02, 2020 12:56 pm
financeperchance wrote:
Thu Jan 02, 2020 9:33 am
Four pages of replies here, and I'm sorry but I don't know why no one has pointed out the returns of utilities before 2000, which were crushed by the S&P 500.
In what time period before 2000?

From Jan. of 1985 through Dec. of 1999, assuming equal monthly contributions, Fidelity Select Utilites enjoyed a rate of return of 18.52% vs. 18.9% for the S&P 500, with a U.S. market correlation of 0.68

I'd hardly call that "crushed." Giving up a mere 0.38% rate of return over that time period for the low correlation with the U.S. market seems like a good deal to me. Much higher Sharpe and Sortino ratios as well.

https://www.portfoliovisualizer.com/bac ... bol3=VUSTX
It's not (explicitly) an index fund, but Franklin Utilities Fund (FKUTX) has tracked the index pretty well and has an inception date of 9/30/1948 and PortfolioVisualizer has daily data for the fund back to 1972. As such, I've found FKUTX to be a good proxy for backtesting the effect of including a dedicated allocation to a portfolio.
I ran a quick factor regression and this fund only has a beta of 0.51. Other factors are value (0.24), size (-0.25), Intermediate Term Rate Risk (1.18!) and Long Term Rate Risk (0.39). In simba's backtesting spreadsheet I created a portfolio with the same approximate factor loadings (50% large cap value, 40% LTT, 80% ITT, -70% cash) and found higher return and lower risk than total stock market and utilities.

As usual, sector concentration turns out to be a thinly disguised factor bet, in this case on value and levered bonds.
vineviz wrote:
Thu Mar 12, 2020 6:57 am
With funds like Fidelity MSCI Utilities ETF (FUTY) & Vanguard Utilities ETF (VPU) at 10bps or less, the cost of this improved diversification isn't very high.
I think you reduced diversification. There is no evidence that FKUTX contains compensated risk factors that are unique to utilities. (p = .8).

We should not be advocating sector concentration increases diversification unless we find overwhelming evidence that that is the best way to gain access to additional risk factors. However, directly targeting the underlying risk factors of utilities has resulted in increased returns and lower risk.

User avatar
abuss368
Posts: 20128
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: Utilities - worth another look?

Post by abuss368 » Thu Mar 12, 2020 7:32 am

Uncorrelated wrote:
Thu Mar 12, 2020 7:29 am

I think you reduced diversification.
I would agree with having a 50% of stock allocation to utilities.
John C. Bogle: Two Fund Portfolio - Total Stock & Total Bond - “Simplicity is the master key to financial success."

User avatar
Forester
Posts: 1295
Joined: Sat Jan 19, 2019 2:50 pm
Location: UK

Re: Utilities - worth another look?

Post by Forester » Thu Mar 12, 2020 8:23 am

abuss368 wrote:
Thu Mar 12, 2020 7:32 am
Uncorrelated wrote:
Thu Mar 12, 2020 7:29 am

I think you reduced diversification.
I would agree with having a 50% of stock allocation to utilities.
Why not just own USMV or SPLV? https://www.portfoliovisualizer.com/bac ... ion3_3=100

User avatar
abuss368
Posts: 20128
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: Utilities - worth another look?

Post by abuss368 » Thu Mar 12, 2020 8:30 am

Forester wrote:
Thu Mar 12, 2020 8:23 am
abuss368 wrote:
Thu Mar 12, 2020 7:32 am
Uncorrelated wrote:
Thu Mar 12, 2020 7:29 am

I think you reduced diversification.
I would agree with having a 50% of stock allocation to utilities.
Why not just own USMV or SPLV? https://www.portfoliovisualizer.com/bac ... ion3_3=100
Interesting. Thanks.
John C. Bogle: Two Fund Portfolio - Total Stock & Total Bond - “Simplicity is the master key to financial success."

User avatar
vineviz
Posts: 6795
Joined: Tue May 15, 2018 1:55 pm

Re: Utilities - worth another look?

Post by vineviz » Thu Mar 12, 2020 10:09 am

Uncorrelated wrote:
Thu Mar 12, 2020 7:29 am
I ran a quick factor regression and this fund only has a beta of 0.51. Other factors are value (0.24), size (-0.25), Intermediate Term Rate Risk (1.18!) and Long Term Rate Risk (0.39). In simba's backtesting spreadsheet I created a portfolio with the same approximate factor loadings (50% large cap value, 40% LTT, 80% ITT, -70% cash) and found higher return and lower risk than total stock market and utilities.

As usual, sector concentration turns out to be a thinly disguised factor bet, in this case on value and levered bonds.
Well, no. For one thing, the factor regression explains no more than a minority of the variance of the utility sector. What was the adjusted R2 in your "quick factor regression"? Less than 0.45, I'd wager.
Uncorrelated wrote:
Thu Mar 12, 2020 7:29 am
We should not be advocating sector concentration increases diversification unless we find overwhelming evidence that that is the best way to gain access to additional risk factors. However, directly targeting the underlying risk factors of utilities has resulted in increased returns and lower risk.
Well, "the best way" has a lot of dimensions. Leveraging up long-short portfolios and/or bond funds is certainly a reasonable approach for some investors, but for many investors an off-the-shelf long-only ETF with an expense ratio of just 8bps might come out on top in a cost/benefit analysis.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

User avatar
Uncorrelated
Posts: 753
Joined: Sun Oct 13, 2019 3:16 pm

Re: Utilities - worth another look?

Post by Uncorrelated » Thu Mar 12, 2020 3:12 pm

vineviz wrote:
Thu Mar 12, 2020 10:09 am
Uncorrelated wrote:
Thu Mar 12, 2020 7:29 am
I ran a quick factor regression and this fund only has a beta of 0.51. Other factors are value (0.24), size (-0.25), Intermediate Term Rate Risk (1.18!) and Long Term Rate Risk (0.39). In simba's backtesting spreadsheet I created a portfolio with the same approximate factor loadings (50% large cap value, 40% LTT, 80% ITT, -70% cash) and found higher return and lower risk than total stock market and utilities.

As usual, sector concentration turns out to be a thinly disguised factor bet, in this case on value and levered bonds.
Well, no. For one thing, the factor regression explains no more than a minority of the variance of the utility sector. What was the adjusted R2 in your "quick factor regression"? Less than 0.45, I'd wager.
Uncorrelated wrote:
Thu Mar 12, 2020 7:29 am
We should not be advocating sector concentration increases diversification unless we find overwhelming evidence that that is the best way to gain access to additional risk factors. However, directly targeting the underlying risk factors of utilities has resulted in increased returns and lower risk.
Well, "the best way" has a lot of dimensions. Leveraging up long-short portfolios and/or bond funds is certainly a reasonable approach for some investors, but for many investors an off-the-shelf long-only ETF with an expense ratio of just 8bps might come out on top in a cost/benefit analysis.
The R^2 was around 0.4. The R^2 isn't the interesting part (imo). The interesting part is that the alpha wasn't anywhere close to statistically significant. If utilities contained unique positive risk factors, I would expect a robust statistically significant alpha under various market models. Even with CAPM the alpha isn't close to being statistically significant.

Investors who want to access the underlying risk factors that causes utilities to outperform total stock market are better off buying a value ETF's, low-vol ETF's or longer term treasuries. These offer more reliable exposure to those risk factors.

User avatar
patrick013
Posts: 2929
Joined: Mon Jul 13, 2015 7:49 pm

Re: Utilities - worth another look?

Post by patrick013 » Thu Mar 12, 2020 6:24 pm

Uncorrelated wrote:
Thu Mar 12, 2020 3:12 pm

Investors who want to access the underlying risk factors that causes utilities to outperform total stock market are better off buying a value ETF's, low-vol ETF's or longer term treasuries. These offer more reliable exposure to those risk factors.

The Giffen Paradox of the index universe or perhaps just a domestic
necessity. Price and return beta are so low. What else can you
call it. They aren't responding to risk factors and resulting AA's
lately.
age in bonds, buy-and-hold, 10 year business cycle

User avatar
vineviz
Posts: 6795
Joined: Tue May 15, 2018 1:55 pm

Re: Utilities - worth another look?

Post by vineviz » Thu Mar 12, 2020 8:51 pm

Uncorrelated wrote:
Thu Mar 12, 2020 3:12 pm
The R^2 was around 0.4. The R^2 isn't the interesting part (imo).
It may not be interesting, but it's very important: that low R2 is what tells you that there is a very large portion of variation in the utility sector that is unexplained by the factor model being used.

This is why it's not possible to fully replicate the diversification benefits of utilities using other common long-only assets: tilting towards value, term, and even low vol definitely won't do it.

In fact, though there is no fund that tracks small cap utilities exclusively the S&P SmallCap 600 Equal Weight Utilities Index is one of the very few indexes I've ever found that loads (with statistical significance) over the past decade on EVERY major factor: market, size, value, momentum, quality, low volatility, AND duration.

Image
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

Frank2012
Posts: 117
Joined: Fri Jan 25, 2013 7:16 pm

Re: Utilities - worth another look?

Post by Frank2012 » Sun Mar 22, 2020 6:41 am

HEDGEFUNDIE wrote:
Mon Mar 18, 2019 4:21 pm
aristotelian wrote:
Mon Mar 18, 2019 4:17 pm
Portfolio 2 is not better diversified. It is concentrated in utilities. It may have had lower volatility in the past but there is the risk of a black swan in utilities. There may be good reasons to concentrate in a particular sector but you should be aware of the risks in doing so.
What possible black swans could exist for local utilities on a nationwide level?

Energy input costs are passed to the ratepayer.

Nationalization?
I don't know about possible black swans for utilities, but there are a number of risks listed below:

1. Investors selling safe havens (e.g., bonds, gold, utilities, etc.) in a flight to cash.
2. Fear that recession/depression will cause a slow down in energy demand, so utilities will take a hit to profits,
3. Fear that utilities have taken on too much debt to expand operations.
4. Given the above, fear that utilities will cut dividends.

But...maybe pick a few stocks instead of a utilities index? If so, use "fun" money....

JamesDean44
Posts: 155
Joined: Sat Jan 13, 2018 7:36 pm

Re: Utilities - worth another look?

Post by JamesDean44 » Thu May 28, 2020 1:13 pm

HEDGEFUNDIE wrote:
Wed Jan 01, 2020 7:05 pm
Carlos Danger wrote:
Wed Jan 01, 2020 6:27 pm
siamond wrote:
Tue Dec 31, 2019 4:53 pm

20 years is a terribly short period of time to reach any conclusion... Notably with sectors (which tend to come and go, not year over year, but decade over decade) and with a moody metric like correlation.

OP, did you take a good look at Fidelity Select Utilities (FSUTX)? This would add 10 more years to your backtest. I took a brief look, it didn't seem terribly exciting to me, but maybe you'll see more to it.
9.5% rate of return vs. 10% rate of return for the S&P 500 assuming equal monthly contributions from January of 1985 through Deecember of 2019, with a correlation to the U.S. stock market of 0.66. Seems very exciting to me. VPU doesn't go as far back, but during it's lifetime it has been even less correlated with the U.S. stock market than FSUTX (.48 vs. .56 from Feb. 2004 through Dec. 2019)

Since its inception, VPU, assuming equal monthly contributions, has returned 10.61% vs. 11.06% for the S&P 500 to go along with that correlation of .48
Man, this is what I've been saying all along! Who wouldn't be enticed by that?
Hedgefundie, if you don't mind sharing, I'm curious whether you decided to include an allocation to utilities and why/why not. The historical results and potential diversification benefits are certainly interesting.

Topic Author
HEDGEFUNDIE
Posts: 4801
Joined: Sun Oct 22, 2017 2:06 pm

Re: Utilities - worth another look?

Post by HEDGEFUNDIE » Thu May 28, 2020 1:16 pm

JamesDean44 wrote:
Thu May 28, 2020 1:13 pm
HEDGEFUNDIE wrote:
Wed Jan 01, 2020 7:05 pm
Carlos Danger wrote:
Wed Jan 01, 2020 6:27 pm
siamond wrote:
Tue Dec 31, 2019 4:53 pm

20 years is a terribly short period of time to reach any conclusion... Notably with sectors (which tend to come and go, not year over year, but decade over decade) and with a moody metric like correlation.

OP, did you take a good look at Fidelity Select Utilities (FSUTX)? This would add 10 more years to your backtest. I took a brief look, it didn't seem terribly exciting to me, but maybe you'll see more to it.
9.5% rate of return vs. 10% rate of return for the S&P 500 assuming equal monthly contributions from January of 1985 through Deecember of 2019, with a correlation to the U.S. stock market of 0.66. Seems very exciting to me. VPU doesn't go as far back, but during it's lifetime it has been even less correlated with the U.S. stock market than FSUTX (.48 vs. .56 from Feb. 2004 through Dec. 2019)

Since its inception, VPU, assuming equal monthly contributions, has returned 10.61% vs. 11.06% for the S&P 500 to go along with that correlation of .48
Man, this is what I've been saying all along! Who wouldn't be enticed by that?
Hedgefundie, if you don't mind sharing, I'm curious whether you decided to include an allocation to utilities and why/why not. The historical results and potential diversification benefits are certainly interesting.
Yes I have had a 10% allocation to FUTY

TwoIdenticalIndexes
Posts: 81
Joined: Tue Jan 14, 2020 5:34 pm

Re: Utilities - worth another look?

Post by TwoIdenticalIndexes » Mon Jun 15, 2020 9:28 am

I think it would be helpful to point out that this strategy comes down to three questions that are fairly clear and probably possible to answer with a good amount of certainty. Unfortunately I can't answer them.

1. Do correlations between sectors tend to hold over time? - Historical data analysis can answer this, and I see no reason for the answer to this question to change over time.

2. Is the standard deviation reduction from inverse correlation greater or lesser than the idiosyncratic risk that would be taken voluntarily by anyone who chose to sector weight this much? - Most people in this thread have been looking at how a utility and total market combination would have performed vs. total market historically. This is the wrong approach. Of course an inversely correlated but decently performing sector would improve performance in back-tested data! The real question going forward is what the probability of portfolio-destroying industry disruption is. You can answer this by postulating about the industry or by looking at P/E values, but the first thing you should do is check historical idiosyncratic risk from specific sector allocation. How often are sectors substantially disrupted, (and what do their P/Es look like before this occurs)?

3. Is this already priced in? EMH would imply that asset managers already know about this inverse correlation, if it exists, and would over-value utilities until the volatility-controlled benefit of tilting to them became zero. If that's the case, then HF would do better to just short his industry. Sounds like others have noted slightly high P/Es in utilities (but this may be because the industry is perceived as less risky in general). I assume the factor analysis people have done already answers the question of whether there is a "not utilities premium."

Post Reply