Utilities - worth another look?

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HEDGEFUNDIE
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Utilities - worth another look?

Post by HEDGEFUNDIE » 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?

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Re: Utilities - worth another look?

Post by KlangFool » Sat Mar 16, 2019 12:56 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).

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?
HEDGEFUNDIE,

If you like actively managed your stock investment, may I suggest either

A) Wellington Fund

or

B) BRK.A or BRK.B

KlangFool

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HEDGEFUNDIE
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Re: Utilities - worth another look?

Post by HEDGEFUNDIE » Sat Mar 16, 2019 1:12 pm

Let me add more context.

My wife and I work in software and biotech, two highly volatile sectors. 1/4 of our income is explicitly tied to the stock price of our companies in the form of RSUs.

Thus I am looking for uncorrelated assets in my investment portfolio to balance out our income risk.

Min vol, utilities, long bonds, all are assets I hold or am considering tilting towards.

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Re: Utilities - worth another look?

Post by nisiprius » Sat Mar 16, 2019 1:40 pm

Uncorrelated?

I once owned shares in the MFS Utilities Fund. I bought the end of 2000, and, being fairly disappointed by its performance thereafter, dumped them a few years later, since they lost -50% while Total Stock was only losing -33%. If I'd hung on, I'd have done better than in Total Stock. But, anyway. That's why I picked them as a utilities fund to compare with Total Stock.

And Morningstar's category average lost -45%.

So, in 2001-2003 both utilities in general, and my utilities fund in particular, lost more than the stock market did. That's particularly relevant because that is the same time period when other "classical" diversifiers like REITs and small-cap value were going up.

Source

Image

In 2008-2009, Total Stock (yellow) lost -52%. Meanwhile, the "utilities" category average lost -47%, the MFS fund lost -48%, Vanguard Utilities (VUIAX, green) lost -44%, Fidelity Select Utilities lost -49%.

So, yes, definitely, utilities didn't lose quite as much as stocks in general. If you want to consider the difference between losing -52% and -47% to be important downside protection, or low correlation, or diversification, you can. I'm not sure how you could exploit that in a meaningful way without, I dunno, going long on utilities and short on stocks and leveraging. And I'm not sure the difference in decline is impressive given the difference in performance afterwards.

To my eyeball, utilities had a bit less risk and a bit less reward, that's all. They were just stocks, not that different from other stocks.
Last edited by nisiprius on Sat Mar 16, 2019 1:42 pm, edited 1 time in total.
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Re: Utilities - worth another look?

Post by vineviz » Sat Mar 16, 2019 1:41 pm

HEDGEFUNDIE wrote:
Sat Mar 16, 2019 12:49 pm
Should we be considering utilities as an independent asset class, similar to how REITs have been viewed in the past?
Utilities offer far better diversification than REITS ever have, and I don't understand the fascination with the latter and ambivalence over the former.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Utilities - worth another look?

Post by HEDGEFUNDIE » Sat Mar 16, 2019 1:46 pm

nisiprius wrote:
Sat Mar 16, 2019 1:40 pm

So, yes, definitely, utilities didn't lose quite as much as stocks in general. If you want to consider the difference between losing -52% and -47% to be important downside protection, or low correlation, or diversification, you can. I'm not sure how you could exploit that in a meaningful way without, I dunno, going long on utilities and short on stocks and leveraging. And I'm not sure the difference in decline is impressive given the difference in performance afterwards.
The way to exploit it is to construct a 50/50 portfolio as I linked to in my OP, and capture the rebalancing bonus from the low correlation.

50 TSM / 50 utilities meaningfully beat 100% TSM over the past 20 years.

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Re: Utilities - worth another look?

Post by KlangFool » Sat Mar 16, 2019 1:50 pm

HEDGEFUNDIE wrote:
Sat Mar 16, 2019 1:12 pm
Let me add more context.

My wife and I work in software and biotech, two highly volatile sectors. 1/4 of our income is explicitly tied to the stock price of our companies in the form of RSUs.

Thus I am looking for uncorrelated assets in my investment portfolio to balance out our income risk.

Min vol, utilities, long bonds, all are assets I hold or am considering tilting towards.
HEDGEFUNDIE,

You are in software and biotech. Would you consider asking an amateur to do your job? What makes you think you are better than Wellington management and/or Warren Buffett?

KlangFool

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HEDGEFUNDIE
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Re: Utilities - worth another look?

Post by HEDGEFUNDIE » Sat Mar 16, 2019 1:54 pm

KlangFool wrote:
Sat Mar 16, 2019 1:50 pm
HEDGEFUNDIE wrote:
Sat Mar 16, 2019 1:12 pm
Let me add more context.

My wife and I work in software and biotech, two highly volatile sectors. 1/4 of our income is explicitly tied to the stock price of our companies in the form of RSUs.

Thus I am looking for uncorrelated assets in my investment portfolio to balance out our income risk.

Min vol, utilities, long bonds, all are assets I hold or am considering tilting towards.
HEDGEFUNDIE,

You are in software and biotech. Would you consider asking an amateur to do your job? What makes you think you are better than Wellington management and/or Warren Buffett?

KlangFool
Well, since you asked, my Excellent Adventure strategy handily beat both Wellington (portfolio 1) and Buffett (portfolio 2) over the past 35 years:

Image

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Re: Utilities - worth another look?

Post by nisiprius » Sat Mar 16, 2019 2:03 pm

HEDGEFUNDIE wrote:
Sat Mar 16, 2019 1:46 pm
nisiprius wrote:
Sat Mar 16, 2019 1:40 pm

So, yes, definitely, utilities didn't lose quite as much as stocks in general. If you want to consider the difference between losing -52% and -47% to be important downside protection, or low correlation, or diversification, you can. I'm not sure how you could exploit that in a meaningful way without, I dunno, going long on utilities and short on stocks and leveraging. And I'm not sure the difference in decline is impressive given the difference in performance afterwards.
The way to exploit it is to construct a 50/50 portfolio as I linked to in my OP, and capture the rebalancing bonus from the low correlation.

50 TSM / 50 utilities meaningfully beat 100% TSM over the past 20 years.
OK. I should have clicked the link.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: Utilities - worth another look?

Post by KlangFool » Sat Mar 16, 2019 2:05 pm

HEDGEFUNDIE wrote:
Sat Mar 16, 2019 1:54 pm
KlangFool wrote:
Sat Mar 16, 2019 1:50 pm
HEDGEFUNDIE wrote:
Sat Mar 16, 2019 1:12 pm
Let me add more context.

My wife and I work in software and biotech, two highly volatile sectors. 1/4 of our income is explicitly tied to the stock price of our companies in the form of RSUs.

Thus I am looking for uncorrelated assets in my investment portfolio to balance out our income risk.

Min vol, utilities, long bonds, all are assets I hold or am considering tilting towards.
HEDGEFUNDIE,

You are in software and biotech. Would you consider asking an amateur to do your job? What makes you think you are better than Wellington management and/or Warren Buffett?

KlangFool
Well, since you asked, my Excellent Adventure strategy handily beat both Wellington (portfolio 1) and Buffett (portfolio 2) over the past 35 years:

Image
HEDGEFUNDIE,

And, why do you think that you can repeat the performance for the next 35 years? It is the future that matters.

KlangFool

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Re: Utilities - worth another look?

Post by HEDGEFUNDIE » Sat Mar 16, 2019 2:13 pm

Getting this thread back on track...

I am thinking about constructing a portfolio like the following, given our volatile incomes.

40% ACWV (Global Min Vol)
20% Total Stock Market
20% Utilities index fund
20% EDV (Ultra Long Treasuries)

https://www.portfoliovisualizer.com/bac ... tion4_1=20

Lower return than 100% TSM but better Sharpe Ratio and lower volatility.

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Re: Utilities - worth another look?

Post by garlandwhizzer » Sat Mar 16, 2019 2:20 pm

HEDGEFUNDIE wrote:

Well, since you asked, my Excellent Adventure strategy handily beat both Wellington (portfolio 1) and Buffett (portfolio 2) over the past 35 years:


HEDGEFUNDIE''s strategy produced a 19.52% compound annual growth rate over 32 years, very impressive. That implies that on average the portfolio doubles in size every 3.5 years. The likelihood that as a real portfolio going forward it will perform similarly over the next 32 years in IMO zero. The strategies it uses--risk control, high leverage, etc.,--are currently widely used by hedge funds and private equity which are typically run by brilliant professionals which was not the case in the vast majority of that 32 years. My guess is that the alpha in this strategy will, like alpha elsewhere, get overgrazed and disappear by those seeking to exploit it. To put it simply, as has been said thousands of times before, past performance does not assure future results. The graphs are nice and it clearly has worked in the long term past but I suspect the future will tell a different story. I wish HEDGEFUNIE good luck as I do all investors, but over the last 32 years that I've been investing I've both engaged in and seen a lot of promising sure-fire outperformance strategies that looked compelling on backtesting crash and burn.

Garland Whizzer

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Re: Utilities - worth another look?

Post by vineviz » Sat Mar 16, 2019 2:35 pm

HEDGEFUNDIE wrote:
Sat Mar 16, 2019 2:13 pm
Getting this thread back on track...

I am thinking about constructing a portfolio like the following, given our volatile incomes.

40% ACWV (Global Min Vol)
20% Total Stock Market
20% Utilities index fund
20% EDV (Ultra Long Treasuries)

https://www.portfoliovisualizer.com/bac ... tion4_1=20

Lower return than 100% TSM but better Sharpe Ratio and lower volatility.
Seems like a very reasonable approach to me.

FWIW, my favorite broad utilities index ETF is VPU (Vanguard Utilities ETF). Both it and the Fidelity version have low expenses and track MSCI utility indexes, which are excellent and reach pretty deep into mid-cap territory for an ever-so-slight size factor bonus relative to XLU.

Vanguard uses the MSCI USA Utilities IMI 25/50 version, though, which slightly further reduces the weight of the top holdings to comply with RIC requirements. For this reason the Vanguard fund is every-so-slightly less concentrated than the Fidelity fund.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

JBTX
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Re: Utilities - worth another look?

Post by JBTX » Sat Mar 16, 2019 2:46 pm

HEDGEFUNDIE wrote:
Sat Mar 16, 2019 2:13 pm
Getting this thread back on track...

I am thinking about constructing a portfolio like the following, given our volatile incomes.

40% ACWV (Global Min Vol)
20% Total Stock Market
20% Utilities index fund
20% EDV (Ultra Long Treasuries)

https://www.portfoliovisualizer.com/bac ... tion4_1=20

Lower return than 100% TSM but better Sharpe Ratio and lower volatility.
It is an interesting portfolio. How does it hold up in a rising interest rate rising inflation environment?

I would say the biggest risk to any particular sector is that the macroeconomic, political and technological environment change such that the sector behaves fundamentally differently than the past. It is quite possible that over the next 20 years our energy portfolio will significantly change. Is that good or bad for utility stocks? While not commenting specifically on "the green new deal", if that type of philosophy became more prevalent how would that impact the industry? Or if the US decided to take significant conservation related actions in the name of climate change, carbon taxes, cap and trade? Or if more people went off grid with solar and other alternatives?

If you have the whole market, you both benefit and get hurt from market changes (Sears stock goes down, Walmart and Amazon go up). If isolated to a specific sector, you have more risk of that sectors changes, for better or for worse.

The history of telecom is a good example, and next could be ISPs.

Utilities is currently only about 3% of the total market so the above risk could be significant.
Last edited by JBTX on Sat Mar 16, 2019 3:15 pm, edited 1 time in total.

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Re: Utilities - worth another look?

Post by patrick013 » Sat Mar 16, 2019 3:13 pm

HEDGEFUNDIE wrote:
Sat Mar 16, 2019 12:49 pm

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

Image

Estimated return forward is lower and historical beta and SD results in a very low volatile portfolio.
VG's ticker VPU always has very low correlation. Return might slip but I don't think you would lose
money with VPU. It's a good index with good returns.
age in bonds, buy-and-hold, 10 year business cycle

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Re: Utilities - worth another look?

Post by Wade Garrett » Sun Mar 17, 2019 10:11 pm

Wish the iShares global utilities etf (JXI) was cheaper. But can't pull the trigger on 47 bps with only 38% of the fund in international when comparing with 10 bps for VPU or 8 for FUTY.

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hdas
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Re: Utilities - worth another look?

Post by hdas » Mon Mar 18, 2019 2:45 pm

Nothing wrong with utilities except the usual pattern on this forum to start paying attention and switching allocations to asset/sectors after they have performed well. :greedy
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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Re: Utilities - worth another look?

Post by aristotelian » Mon Mar 18, 2019 3:11 pm

There is no reason to expect higher return than other stocks. The only reason to do RE or Utilities is to reduce portfolio volatility. Personally, I do not care about volatility on the stock side, and, moreover, I do not think the solution is to concentrate in sectors that might increase risk. If you really want to reduce volatility, best bet is LT Treasuries.

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Re: Utilities - worth another look?

Post by vineviz » Mon Mar 18, 2019 3:39 pm

aristotelian wrote:
Mon Mar 18, 2019 3:11 pm
There is no reason to expect higher return than other stocks. The only reason to do RE or Utilities is to reduce portfolio volatility. Personally, I do not care about volatility on the stock side, and, moreover, I do not think the solution is to concentrate in sectors that might increase risk. If you really want to reduce volatility, best bet is LT Treasuries.
Portfolio construction doesn't necessarily have to be an either/or process. It is usually better to diversify within the equity holdings AND diversify between equities and bonds than to do just one of those. And even if utilities don't have higher expected returns than the total stock market, because of their low correlations and differing factor exposures a mix of utilities and total stock market CAN have a higher expected return than just total stock market alone.

Here's an example:

Portfolio 1 is a simple mix of 80% S&P 500 and 20% long-term US treasury bonds.

Portfolio 2 includes those plus iShares S&P 600 Value ETF and Utilities Select Sector SPDR ETF.

Image

The better diversified Portfolio has exhibited lower volatility and drawdowns PLUS higher returns than portfolio 1.

https://www.portfoliovisualizer.com/bac ... tion5_2=15
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Utilities - worth another look?

Post by aristotelian » Mon Mar 18, 2019 4:17 pm

vineviz wrote:
Mon Mar 18, 2019 3:39 pm
aristotelian wrote:
Mon Mar 18, 2019 3:11 pm
There is no reason to expect higher return than other stocks. The only reason to do RE or Utilities is to reduce portfolio volatility. Personally, I do not care about volatility on the stock side, and, moreover, I do not think the solution is to concentrate in sectors that might increase risk. If you really want to reduce volatility, best bet is LT Treasuries.
Portfolio construction doesn't necessarily have to be an either/or process. It is usually better to diversify within the equity holdings AND diversify between equities and bonds than to do just one of those. And even if utilities don't have higher expected returns than the total stock market, because of their low correlations and differing factor exposures a mix of utilities and total stock market CAN have a higher expected return than just total stock market alone.

Here's an example:

Portfolio 1 is a simple mix of 80% S&P 500 and 20% long-term US treasury bonds.

Portfolio 2 includes those plus iShares S&P 600 Value ETF and Utilities Select Sector SPDR ETF.

Image

The better diversified Portfolio has exhibited lower volatility and drawdowns PLUS higher returns than portfolio 1.

https://www.portfoliovisualizer.com/bac ... tion5_2=15
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.

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Re: Utilities - worth another look?

Post by HEDGEFUNDIE » 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?

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Re: Utilities - worth another look?

Post by aristotelian » Mon Mar 18, 2019 4:23 pm

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?
No idea. It wouldn't be a black swan if I could predict it. Cyberattack?

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HEDGEFUNDIE
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Re: Utilities - worth another look?

Post by HEDGEFUNDIE » Mon Mar 18, 2019 4:29 pm

Let's back up and review the facts at hand:

1. 100% of our family income is concentrated in tech and healthcare
2. 33% of VTSAX is concentrated in tech and healthcare
3. Utilities exhibit the lowest correlation to both those sectors (around 0.5 correlation)
4. Utilities only comprise 3% of VTSAX

So what's the problem with tilting towards utilities?

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Re: Utilities - worth another look?

Post by vineviz » Mon Mar 18, 2019 4:38 pm

aristotelian wrote:
Mon Mar 18, 2019 4:17 pm
Portfolio 2 is not better diversified. It is concentrated in utilities.
The first sentence I quoted is objectively untrue, and the second sentence is a non sequitur.

No point debating the former, as it just is what it is.

Altering the weights of assets in a portfolio is precisely the mechanism by which you can increase (or decrease) the diversification of the portfolio. The second sentence I quoted appears to be rooted in the widely held, but mistaken, belief that a market cap weighted portfolio is the most diversified portfolio possible.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Utilities - worth another look?

Post by bondsr4me » Mon Mar 18, 2019 5:23 pm

HEDGEFUNDIE wrote:
Mon Mar 18, 2019 4:29 pm
Let's back up and review the facts at hand:

1. 100% of our family income is concentrated in tech and healthcare
2. 33% of VTSAX is concentrated in tech and healthcare
3. Utilities exhibit the lowest correlation to both those sectors (around 0.5 correlation)
4. Utilities only comprise 3% of VTSAX

So what's the problem with tilting towards utilities?
If it fits your asset allocation, nothing at all IMO.

aristotelian
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Re: Utilities - worth another look?

Post by aristotelian » Mon Mar 18, 2019 5:43 pm

vineviz wrote:
Mon Mar 18, 2019 4:38 pm
aristotelian wrote:
Mon Mar 18, 2019 4:17 pm
Portfolio 2 is not better diversified. It is concentrated in utilities.
The first sentence I quoted is objectively untrue, and the second sentence is a non sequitur.

No point debating the former, as it just is what it is.

Altering the weights of assets in a portfolio is precisely the mechanism by which you can increase (or decrease) the diversification of the portfolio. The second sentence I quoted appears to be rooted in the widely held, but mistaken, belief that a market cap weighted portfolio is the most diversified portfolio possible.
You seem to be reflecting the widely held, but mistaken, belief that increasing the number of funds in a portfolio increases diversification. Substitute "reduced volatility" or use a qualifier like "risk-diversification" and I would not disagree. Anyway, this is a tiresome debate and mostly semantic so I will leave it to OP to decide.
Last edited by aristotelian on Mon Mar 18, 2019 5:52 pm, edited 1 time in total.

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Re: Utilities - worth another look?

Post by Wade Garrett » Mon Mar 18, 2019 5:48 pm

Why are REITs viewed as a diversifier i.e. a quasi separate asset class while utilities are viewed as a sector bet i.e. "active management"? Is the different corporate structure of REITs why they are viewed as unique and not a sector bet?

FWIW I have a small tilt to REITs and no tilt to utilities. But utilities in the past have been as good (or better) a diversifier as REITs and I've been thinking about making a small tilt toward utilities.

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Re: Utilities - worth another look?

Post by aristotelian » Mon Mar 18, 2019 5:51 pm

HEDGEFUNDIE wrote:
Mon Mar 18, 2019 4:29 pm
Let's back up and review the facts at hand:

1. 100% of our family income is concentrated in tech and healthcare
2. 33% of VTSAX is concentrated in tech and healthcare
3. Utilities exhibit the lowest correlation to both those sectors (around 0.5 correlation)
4. Utilities only comprise 3% of VTSAX

So what's the problem with tilting towards utilities?
I would only say that you use the present tense in #3, but their forward performance cannot be known. by concentrating in utilities there is some risk that past performance doesn't hold up. Will you be able to stomach the risk when utilities drop more than the overall market?

Also, sector funds are generally more expensive than total market. You will have some fee drag, have fewer options when tax loss harvesting, etc.

Otherwise, sounds reasonable. I don't see any inherent reason why RE should be preferrable to utilities.

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HEDGEFUNDIE
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Re: Utilities - worth another look?

Post by HEDGEFUNDIE » Mon Mar 18, 2019 5:56 pm

aristotelian wrote:
Mon Mar 18, 2019 5:51 pm
I would only say that you use the present tense in #3, but their forward performance cannot be known. by concentrating in utilities there is some risk that past performance doesn't hold up.
This is a fair point. Correlations can change. Here are XLU (S&P 500 utilities) and XLK (S&P 500 tech) correlated against TSM.

Over the past 20 years Tech has basically been synonymous with the Market. Utilities, not so much, although it has been highly correlated at certain points.

Image

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Re: Utilities - worth another look?

Post by fennewaldaj » Mon Mar 18, 2019 9:52 pm

I can certainly see the appeal of tilting towards utilities. If I were to do so I would likely make it more like a 5-10 of US equities thing though. Since its a small sector bumping it to ~10% of equities seems perfectly reasonable to me. Since utilities are fairly heavily regulated my first instinct would be that there low correlation to the rest of the market is likely to continue. The only place I could access a utilities index fund would be in my ROTH IRA or taxable (in fidelity accounts I could use their active fund). Together those only represent 20% of my new money and they are mostly filled with other things. With full control I would definitely consider it.

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Re: Utilities - worth another look?

Post by H-Town » Mon Mar 18, 2019 10:55 pm

HEDGEFUNDIE wrote:
Mon Mar 18, 2019 4:29 pm
Let's back up and review the facts at hand:

1. 100% of our family income is concentrated in tech and healthcare
2. 33% of VTSAX is concentrated in tech and healthcare
3. Utilities exhibit the lowest correlation to both those sectors (around 0.5 correlation)
4. Utilities only comprise 3% of VTSAX

So what's the problem with tilting towards utilities?
Constructing 50/50 low correlation and enjoy the rebalancing bonus is a great idea. But I wouldn't trust myself to rebalancing myself. It's too easy to let the winners ride. If somehow you can set up automatic rebalancing, then why not?

klaus14
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Re: Utilities - worth another look?

Post by klaus14 » Tue Mar 19, 2019 2:57 am

VPU P/E: 20.6x
VPU Earnings Growth: 6.2%

VTI P/E: 19.3x
VTI Earnings Growth: 9.7%

Not Nice. VPU grows slower but has a larger multiple compared to total market. You pay a lot of money for lower volatility.

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Re: Utilities - worth another look?

Post by Rus In Urbe » Tue Mar 19, 2019 5:05 am

Okay, call me old-fashioned, or a kind of Warren Buffett type investor, but doesn't the underlying business model---the way that these companies actually make profits---inform decisions about investing? :oops:

Utilities? I'd be unpacking what's INSIDE utilities---which companies and how they are making (or not making) their profits.

For some really interesting reading on the write-downs that major banks are taking on all (I mean all) oil and gas company investments, read Bill McKibben's latest essay in the The New York Review of Books.

https://www.nybooks.com/articles/2019/0 ... sil-fuels/

Then, tell me if all those write-downs aren't going to affect the utilities sector in the next decade.
Hint: they already are being priced into the smart markets.

Utilities right now? Not for me. Too many unknown unknowns.
I'd like to live as a poor man with lots of money. ~Pablo Picasso

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HEDGEFUNDIE
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Re: Utilities - worth another look?

Post by HEDGEFUNDIE » Tue Mar 19, 2019 5:46 am

Rus In Urbe wrote:
Tue Mar 19, 2019 5:05 am
Okay, call me old-fashioned, or a kind of Warren Buffett type investor, but doesn't the underlying business model---the way that these companies actually make profits---inform decisions about investing? :oops:

Utilities? I'd be unpacking what's INSIDE utilities---which companies and how they are making (or not making) their profits.

For some really interesting reading on the write-downs that major banks are taking on all (I mean all) oil and gas company investments, read Bill McKibben's latest essay in the The New York Review of Books.

https://www.nybooks.com/articles/2019/0 ... sil-fuels/

Then, tell me if all those write-downs aren't going to affect the utilities sector in the next decade.
Hint: they already are being priced into the smart markets.

Utilities right now? Not for me. Too many unknown unknowns.
Why would the end of fossil fuels hurt utilities?

You’re still going to get your energy from somewhere. Whether it’s generated from solar, wind, hydro, or coal and natural gas.

The utilities business model is as bulletproof as you can get. Capital investments and operating costs all get passed to the ratepayer, plus a guaranteed profit margin on top. Guess who is ultimately paying for retrofitting to green energy? Not the utility, that’s for sure:

https://www.wsj.com/articles/utilities- ... 1429567463

Unless you’re telling me we’ll be generating most of our own energy via solar + battery storage. How many decades will that take?

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Re: Utilities - worth another look?

Post by nisiprius » Tue Mar 19, 2019 6:11 am

vineviz wrote:
Mon Mar 18, 2019 4:38 pm
aristotelian wrote:
Mon Mar 18, 2019 4:17 pm
Portfolio 2 is not better diversified. It is concentrated in utilities.
The first sentence I quoted is objectively untrue, and the second sentence is a non sequitur...
Please remind us again of your definition of "diversified..." and explain why it is "objectively" the only correct definition, and that others (for example, "not holding more than 5% of assets in the stock of a single issuer") are "objectively" incorrect.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: Utilities - worth another look?

Post by HEDGEFUNDIE » Tue Mar 19, 2019 6:17 am

nisiprius wrote:
Tue Mar 19, 2019 6:11 am
vineviz wrote:
Mon Mar 18, 2019 4:38 pm
aristotelian wrote:
Mon Mar 18, 2019 4:17 pm
Portfolio 2 is not better diversified. It is concentrated in utilities.
The first sentence I quoted is objectively untrue, and the second sentence is a non sequitur...
Please remind us again of your definition of "diversified..." and explain why it is "objectively" the only correct definition, and that others (for example, "not holding more than 5% of assets in the stock of a single issuer") are "objectively" incorrect.
This should be intuitive.

If my only investment holding was a utilities, or tech, or health care index fund, would you say I was diversified?

If the assets you hold move up and down in unison, you are objectively not diversified.

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Re: Utilities - worth another look?

Post by Rus In Urbe » Tue Mar 19, 2019 6:21 am

Rus In Urbe wrote: ↑Tue Mar 19, 2019 6:05 am
Okay, call me old-fashioned, or a kind of Warren Buffett type investor, but doesn't the underlying business model---the way that these companies actually make profits---inform decisions about investing? :oops:

Utilities? I'd be unpacking what's INSIDE utilities---which companies and how they are making (or not making) their profits.

For some really interesting reading on the write-downs that major banks are taking on all (I mean all) oil and gas company investments, read Bill McKibben's latest essay in the The New York Review of Books.

https://www.nybooks.com/articles/2019/0 ... sil-fuels/

Then, tell me if all those write-downs aren't going to affect the utilities sector in the next decade.
Hint: they already are being priced into the smart markets.

Utilities right now? Not for me. Too many unknown unknowns.

HEDGEFUNDIE wrote:
Why would the end of fossil fuels hurt utilities?
You’re still going to get your energy from somewhere. Whether it’s generated from solar, wind, hydro, or coal and natural gas.
The utilities business model is as bulletproof as you can get. Capital investments and operating costs all get passed to the ratepayer, plus a guaranteed profit margin on top. Guess who is ultimately paying for retrofitting to green energy? Not the utility, that’s for sure:
https://www.wsj.com/articles/utilities- ... 1429567463
Unless you’re telling me we’ll be generating most of our own energy via solar + battery storage. How many decades will that take?
Please take the time to actually read the article. You are making the classic knee-jerk mistake of thinking that renewables create the same level of profits for a utility. :oops: The reality is quite different. Banks making write-downs---they know something you don't. Anything but bulletproof; moving faster than most investors think. Also the subject of Natural Gas is discussed in the piece. Check it out. Actually read it.
Last edited by Rus In Urbe on Tue Mar 19, 2019 6:26 am, edited 2 times in total.
I'd like to live as a poor man with lots of money. ~Pablo Picasso

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Re: Utilities - worth another look?

Post by vineviz » Tue Mar 19, 2019 6:24 am

aristotelian wrote:
Mon Mar 18, 2019 5:43 pm

You seem to be reflecting the widely held, but mistaken, belief that increasing the number of funds in a portfolio increases diversification.
That would be absurd, which is why I never suggested any such thing.

The number of funds is irrelevant. All that matters, as far as diversification goes, is their correlation and volatility.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Utilities - worth another look?

Post by aristotelian » Tue Mar 19, 2019 6:29 am

vineviz wrote:
Tue Mar 19, 2019 6:24 am
aristotelian wrote:
Mon Mar 18, 2019 5:43 pm

You seem to be reflecting the widely held, but mistaken, belief that increasing the number of funds in a portfolio increases diversification.
That would be absurd, which is why I never suggested any such thing.

The number of funds is irrelevant. All that matters, as far as diversification goes, is their correlation and volatility.
Concentration is one sector is the opposite of diversification, period. It is possible that such concentration can reduce overall volatility but it brings risk.

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Re: Utilities - worth another look?

Post by HEDGEFUNDIE » Tue Mar 19, 2019 6:39 am

aristotelian wrote:
Tue Mar 19, 2019 6:29 am
vineviz wrote:
Tue Mar 19, 2019 6:24 am
aristotelian wrote:
Mon Mar 18, 2019 5:43 pm

You seem to be reflecting the widely held, but mistaken, belief that increasing the number of funds in a portfolio increases diversification.
That would be absurd, which is why I never suggested any such thing.

The number of funds is irrelevant. All that matters, as far as diversification goes, is their correlation and volatility.
Concentration is one sector is the opposite of diversification, period. It is possible that such concentration can reduce overall volatility but it brings risk.
What we are talking about here is reducing the concentration of VTSAX (and my family’s human capital) in certain high flying growth sectors by tilting to utilities.

So the overall sector concentration of the portfolio (including human capital) is actually reduced.

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Re: Utilities - worth another look?

Post by vineviz » Tue Mar 19, 2019 6:41 am

aristotelian wrote:
Tue Mar 19, 2019 6:29 am
Concentration is one sector is the opposite of diversification, period.
Concentration relative to what? Market cap weighting?

If that is what you mean, it is not true now and has never been true: the market cap weightings of sectors contain no information on their own about the level of diversification. Neither do the number of sectors or the number of stocks.

As I just said, all that matters – in terms of diversification - is correlation with the portfolio and level of volatility.

If you find it tiresome to find yourself contradicted so repeatedly, I urge you to read up on the concept of diversification instead of continuing to make the same errors over and over.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Utilities - worth another look?

Post by Rus In Urbe » Tue Mar 19, 2019 6:43 am

. . . you can lead a horse to water . . .
I'd like to live as a poor man with lots of money. ~Pablo Picasso

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Re: Utilities - worth another look?

Post by aristotelian » Tue Mar 19, 2019 7:48 am

HEDGEFUNDIE wrote:
Tue Mar 19, 2019 6:39 am
aristotelian wrote:
Tue Mar 19, 2019 6:29 am

Concentration is one sector is the opposite of diversification, period. It is possible that such concentration can reduce overall volatility but it brings risk.
What we are talking about here is reducing the concentration of VTSAX (and my family’s human capital) in certain high flying growth sectors by tilting to utilities.

So the overall sector concentration of the portfolio (including human capital) is actually reduced.
I understand what you are talking about and have no particular issue with it. I just wouldn't call it diversification.

You are taking a risk that something bad happens in utilities, and you will underperform the market. Calling it "diversification" in my mind obfuscates that risk.

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Re: Utilities - worth another look?

Post by Rus In Urbe » Tue Mar 19, 2019 8:24 am

Disruption about to happen in the utilities sector. Of course, where it will all end up is anyone's guess, but utilities are no longer "bulletproof" for sure.

This from Bill McKibben's excellent essay on energy from the latest issue of The New York Review of Books:
Over the last decade, there has been a staggering fall in the price of solar and wind power, and of the lithium-ion batteries used to store energy. This has led to rapid expansion of these technologies, even though they are still used much less than fossil fuels: in 2017, for instance, sun and wind produced just 6 percent of the world’s electric supply, but they made up 45 percent of the growth in supply, and the cost of sun and wind power continues to fall by about 20 percent with each doubling of capacity. Bond’s analysis suggests that in the next few years, they will represent all the growth. We will then reach peak use of fossil fuels, not because we’re running out of them but because renewables will have become so cheap that anyone needing a new energy supply will likely turn to solar or wind power.
Bond writes that in the 2020s—probably the early 2020s—the demand for fossil fuels will stop growing. The turning point in such transitions “is typically the moment when the impact is felt in financial markets”—when stock prices tumble and never recover. Who is going to invest in an industry that is clearly destined to shrink? Though we’ll still be using lots of oil, its price should fall if it has to compete with the price of sunshine. Hence the huge investments in pipelines and tankers and undersea exploration will be increasingly unrecoverable. Precisely how long it will take is impossible to predict, but the outcome seems clear.

and

“In 2017, the price in India of wind and solar power dropped 50 percent to $35–40 a megawatt hour,” said Tim Buckley, who analyzes Australasia/South Asia for the Institute for Energy Economics and Financial Analysis. “Fifty percent in one year. And a zero inflation indexation for the next twenty-five years. Just amazing.” This price drop occurred not because India subsidizes renewable energy (it doesn’t), but because engineers did such a good job of making solar panels more efficient. The cost of power from a newly built coal plant using Indian coal is, by comparison, about $60 a megawatt hour. If you have to import the coal, the price of power is $70/megawatt hour. And solar’s $40/megawatt hour price is guaranteed not to rise over the thirty-year life of the contract the suppliers sign—their bids are based on building and then running a facility for the life of the contract. No wonder that over the first nine months of 2018, India installed forty times more capacity for renewable than for coal-fired power.

and

You get some sense of the future from the stunning fall of General Electric. “They were the world leader, the thought leader, the finance leader, the IT leader,” said Buckley. “And their share price is down 70 percent in the last two and a half years, in a market that’s up 50 percent. It’s a thermal power–reliant basket case.” That’s in large measure because manufacturing turbines for coal- and gas-fired power plants was a significant part of the company’s business; in 2015, it hugely expanded that capacity by buying its largest European competitor, Alstom. But then the bottom dropped out of the industry as proposed new generating plants couldn’t find financing. GE makes wind turbines, too, but that’s a lower-margin business with many more competitors. The fall in GE’s stock has meant “hundreds of billions of dollars of shareholder value reduction,” according to Buckley. Last June, after more than a century, General Electric was dropped from the Dow Industrial Index, replaced by a drugstore chain.

and

The recent history of European utilities may provide a more realistic preview of what will happen in the rest of the world. In the early years of this century the German government increased the pace of decarbonization, subsidizing solar and wind energy. As more and cheaper renewable supplies became available, the existing utilities were slow to react. They had built new gas plants to account for what they assumed would be rising demand, but solar and wind cut into that demand, and the price of electricity began to fall. So far, European utilities have written down about $150 billion in stranded assets: fossil fuel installations that are no longer needed. “In the Netherlands, by the time the last three coal plants were turned on, their owners had already written them down by 70 percent,” said Buckley. And they’re scheduled to close by 2030.
Read the article if you have questions about what the legacy utilities are doing about investing in renewables. Hint: they are not; the business model is not as profitable as extraction and distribution of fossil fuels.

So, this is the forward-look at energy and utilities. Could be a great place to invest. Or not.

For me. Too risky.
I'd like to live as a poor man with lots of money. ~Pablo Picasso

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Re: Utilities - worth another look?

Post by EfficientInvestor » Tue Mar 19, 2019 8:34 am

The backtest below includes the performance of a variety of Fidelity Select Sector Funds dating back to 1987. I have also included a long term treasury fund and gold fund for grins. If you click on the “assets” tab, you can view the performance of each fund over the time period and also view correlation to the market and correlation between each of the funds. I think the biggest thing that sticks out to me when considering the use of utilities is that the consumer staples sector has had a comparable correlation to the market as utilities but with better return and less volatility. I would expect that trend to continue given the nature of consumer staples. Perhaps you should consider it in addition to utilities?

https://www.portfoliovisualizer.com/bac ... n13_1=7.69

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Re: Utilities - worth another look?

Post by vineviz » Tue Mar 19, 2019 8:58 am

EfficientInvestor wrote:
Tue Mar 19, 2019 8:34 am
The backtest below includes the performance of a variety of Fidelity Select Sector Funds dating back to 1987. I have also included a long term treasury fund and gold fund for grins. If you click on the “assets” tab, you can view the performance of each fund over the time period and also view correlation to the market and correlation between each of the funds. I think the biggest thing that sticks out to me when considering the use of utilities is that the consumer staples sector has had a comparable correlation to the market as utilities but with better return and less volatility. I would expect that trend to continue given the nature of consumer staples. Perhaps you should consider it in addition to utilities?

https://www.portfoliovisualizer.com/bac ... n13_1=7.69
Part of the answer is that past performance isn’t a terribly good proxy for expected future returns. Indeed, it’d be illogical to expect one sector to have lower risk and higher return than another.

Another part of the answer is that it’s both the lower correlation and higher volatility that makes the utility sector a better source of diversification than staples.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Utilities - worth another look?

Post by JM555 » Fri Jun 14, 2019 10:45 am

KlangFool wrote:
Sat Mar 16, 2019 1:50 pm
HEDGEFUNDIE wrote:
Sat Mar 16, 2019 1:12 pm
Let me add more context.

My wife and I work in software and biotech, two highly volatile sectors. 1/4 of our income is explicitly tied to the stock price of our companies in the form of RSUs.

Thus I am looking for uncorrelated assets in my investment portfolio to balance out our income risk.

Min vol, utilities, long bonds, all are assets I hold or am considering tilting towards.
HEDGEFUNDIE,

You are in software and biotech. Would you consider asking an amateur to do your job? What makes you think you are better than Wellington management and/or Warren Buffett?

KlangFool

Hey. I’m just as good as buffet, maybe slightly better


Returns wise LOL LOL LOL


You give some great answers, I notice.

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Re: Utilities - worth another look?

Post by JM555 » Fri Jun 14, 2019 10:46 am

KlangFool wrote:
Sat Mar 16, 2019 12:56 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).

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?
HEDGEFUNDIE,

If you like actively managed your stock investment, may I suggest either

A) Wellington Fund

or

B) BRK.A or BRK.B

KlangFool

Genius answer

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Re: Utilities - worth another look?

Post by JM555 » Fri Jun 14, 2019 10:48 am

HEDGEFUNDIE wrote:
Sat Mar 16, 2019 1:54 pm
KlangFool wrote:
Sat Mar 16, 2019 1:50 pm
HEDGEFUNDIE wrote:
Sat Mar 16, 2019 1:12 pm
Let me add more context.

My wife and I work in software and biotech, two highly volatile sectors. 1/4 of our income is explicitly tied to the stock price of our companies in the form of RSUs.

Thus I am looking for uncorrelated assets in my investment portfolio to balance out our income risk.

Min vol, utilities, long bonds, all are assets I hold or am considering tilting towards.
HEDGEFUNDIE,

You are in software and biotech. Would you consider asking an amateur to do your job? What makes you think you are better than Wellington management and/or Warren Buffett?

KlangFool
Well, since you asked, my Excellent Adventure strategy handily beat both Wellington (portfolio 1) and Buffett (portfolio 2) over the past 35 years:

Image


AMEN! Keep ignoring the fools. Keep doing your research and keep beating the market. Great job!

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Re: Utilities - worth another look?

Post by sergeant » Fri Jun 14, 2019 1:48 pm

I think your plan is correct for you. It would be horrible for someone employed by a utility.
Lincoln 3 EOW!

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