Michael R. Yogg, who manages Putnam's Global Utilities Fund, explains what investors want from the sector.
Richard Stavros is Fortnightly's Executive Editor.
Is the love affair with utility stocks cooling? After an unprecedented run the past few years, in which utilities outperformed the S&P 500, a Standard and Poor’s equity research report in late May included a negative outlook for electric utilities: “After rising 11.7 percent in 2005, versus a 3.8 percent increase for the S&P 1500, the S&P Electric Utilities Index was down 1.7 percent year to date through May 12, versus a 4 percent increase for the S&P 1500. ... We think the sector will underperform in 2006, weakened by the rising interest-rate environment,” the report said. The Standard & Poor’s 1500 Supercomposite is a broad-based capitalization-weighted index of 1500 U.S. companies.
But not all investors agree. Some believe higher interest rates may not drive down utility stocks by more than market averages.
Naturally, all this depends on the performance of the economy, and there is no shortage of views and forecasts on its direction. Moreover, others feel it is not just the level of stock prices in the utility space that gives cause for concern, but the tougher regulatory environment.