Reaves Asset Management is a USD3 billion specialist investment firm focused on the utilities sector, mostly in the US. Its Utilities ETF (UTES), recently rebranded as the Virtus Reaves Utilities ETF, gives access to their specialist knowledge of this complicated sector and has produced a 64 per cent return, annualised at 14.7 per cent, since launch in 2015.
The UTES ETF has also seen a lowering of its management fee to 49 basis points. The firm is also planning to launch an Irish UCITS fund as well. Joseph (Jay) Rhame III, CEO of Reaves Asset Management and co-portfolio manager of UTES, with USD15 million in assets, explains that this is the only actively managed utilities ETF, and represents four decades of experience in the sector.
The firm was founded in 1961, and has been managing money since 1978 in the utility, energy, communication and infrastructure sectors since that time.
The firm’s investment strategy has achieved a little over 100 basis points above the S&P 500 since inception.
“We have always taken the approach that we can do better for our clients by being real experts in our sectors rather than everything to everyone,” Rhame says.
“They are complicated sectors because in the US, utilities are regulated at each State level so there are 50 types of different regulations to deal with.”
Investors, currently largely from the US or Canada, come to the utility products because of the attraction of dividend yields or fears about the market, Rhame says.
The ETF was a step towards democratising what Reaves does and invests in utilities only. “We wanted to give the investor a true idea of our expertise level in each sector. With the ETF we have a way to take our expertise and make it available to anyone with a brokerage account.”
The ETF invests largely in US utilities, while a few UK utility investments remain as a legacy since inception.
“It’s a true bottom up portfolio risk/reward thing,” Rhame says. “Opportunities in US utilities have been pretty strong whereas the rest of the world struggles to compete on that front, but we are happy to make investments elsewhere if the opportunities arise.”
The European launch in May is part of the rebranding and regional expansion plan for Reaves Asset Management.
“The utilities sector is generally misunderstood as it only represents 3 per cent of the S&P 500. It’s very complicated and with all the different regulations you have to dedicate a lot of resources to it. We do a lot of visits with management teams and regulators to stay ahead of the regulations and figure out each political agenda because the governor of each State appoints the utility regulators.”
Rhame notes that much of Wall Street incorrectly sees the utility sector as such a small part of the S&P that it won’t make much difference to their overall portfolios.
“So, it’s a punt, bought for macro reasons looking at the dividend yield against the 10 year US treasury and on a value determination based just on that. What they are missing is that the industry is about as strong as it has ever been.”
Rhame says this is partially because utilities have never really changed. “Technology doesn’t matter, monopolies have a set return model, you can grow a bit through good relationships with regulators but for a long time the math was that everything you do in the utilities sector is limited by what you can ask your customers to pay each year.”
Rhame says that now the reason why things are looking good in the sector is that the cost of renewable power has fallen a lot. “Companies can shut down coal plants and replace them with wind farms, reduce the cost to the customers and it’s also good for the environment, which is popular.”
The relationship has changed because utility firms can spend a lot of money and achieve lower costs at the same time. “It’s now about how much can they borrow to build,” Rhame says. “It puts the math on its head and they can plan ahead for the next five to 10 years which makes it a very different industry today. Growth has improved and become consistent and valuations have come up and are well deserved.”
The other accepted norm for the utility industry that has been overthrown in this quiet but powerful revolution, is that it was a general perception that utilities can’t go up when interest rates go up.
“Interest rates started to go up for the first time in a long time in December 2015, so over the course of this time interest rates have gone through their cycle up and we have still been able to do pretty well.”
