"We still need to turn the lights on and off every day" says portfolio manager
As a category of essential services, utilities have historically performed well during times of economic crisis, as their need never diminishes.
And while the economic outlook of markets have grown murkier by the day, Mike Dragosits suggests the value of defensive utilities funds will continue to grow in future years.
Looking back at periods of market uncertainty, the portfolio manager at Harvest ETFs, says history has shown strong utilities performance during recessions, as energy and telecommunications needs are an ever-present no matter the economic situation.
“We still need to turn the lights on and off every day, no matter when we're in a recession or not, gas still needs to flow and water still needs to be used,” said Dragosits, who leads management for his firm’s utilities ETF. “Going forward, there is some uncertainty, and that's been heightened by what we're seeing in the news flow lately and that's really where utilities tend to outperform, from a relative perspective, is in that environment.”
Dragosits highlighted the interest rate hikes of 2023 as an example of the value in utilities, where they outperformed the market. As interest rates have begun to decline, Dragosits says the “soft-landing” cases in the past, where economies are still performing steadily, have spelled slight downturns for utilities, though current market uncertainty could deviate from this historic trend. He points to the “hard-landing” crashes of 2008 and 2020, where interest rates plummeted along with the economy, as proof of the success of utilities during market turmoil.
“In 1984 and 1995 we saw a soft landing outcome, and that's kind of where we still kind of feel like we are today. The [US] economy is still looking pretty good, and that's generally been a good time for both equity markets as well as utilities,” he said. “But when the utilities really shine is during that hard landing scenario.”
Since the pandemic, the energy-reliant tech industry has boomed, particularly in the artificial intelligence sphere. The astronomical amount of energy needed to service AI data centres has only increased annual returns and anticipation for the future, according to Dragosits.
“We're really pushing into sort of the technological innovation, and that's ramped up growth expectations from the juicy one to two per cent to … three to four per cent growth expectations,” he said. “It’s not anything like what you see in the tech space, but certainly in this space, when you have really high yields to begin with and a steady, regulated business model, you add a couple points of growth. From a total return perspective, it starts to get a little bit more exciting for utilities.”
The fund is highly market-driven according to Dragosits, who says only big players with high dividends are included by Harvest. This allows for large levels of market certainty and consumer confidence.
“We don't pick individual stocks in this fund it is sort of a formula based approach,” he explained. “And we're looking at the 30 largest, highest dividend paying companies in that universe.”
Holding a global, diversified fund allows Harvest to spread out risk factors such as natural disasters and government regulation. He added that US states have different regulatory bodies, meaning that diversification with the States is another strategy the ETF employs.
“By broadening out, you're reducing some of that catastrophe risk,” he said. “Investing in different European countries, you're really helping to broaden out your exposure to any one regulatory risk in any one in any one area by having a broader basket of diversified utilities names.”
