Gabelli and Winter look for utilities with locations in favorable regulatory environments and generation facilities that produce lower carbon footprints. They also like utilities with pending transmission line developments, which will help improve efficiency and increase capacity, as well as natural gas pipeline and storage operators that can take advantage of the growing demand for natural gas.
The strategy has helped Gabelli Utilities deliver better performance with less volatility over the long term than most other utility sector mutual funds and indexed ETFs. The most popular of these, the Utilities Sector SPDR (XLU), saw annualized returns of 0.53% over the last three years, 2.9% over the last five years and 4.9% over the last ten years ended August 31 while the Gabelli Utilities fund saw growth of 4.4%, 4.3% and 6.6% in those periods. While the mutual fund sank 21% during 2008's stock market rout, it still held up better than the ETF, which saw a 29% decline.
Fund holdings with favorable earnings prospects include El Paso Electric, which serves some 378,000 customers in and around El Paso, Texas and Las Cruces, N.M. The company is experiencing a strong growth in its customer base and should benefit from the expansion of a nearby military base by 2012.
Gabelli also likes Central Hudson Gas & Electric, which operates in the Poughkeepsie, N.Y., area. He believes the company, which raises its dividends regularly and has been actively buying back its stock, stands to benefit if drilling opens up at the Marcellus Shale, an expansive natural gas source that spreads through New York and several other northeastern states. (He notes for the sake of disclosure that the firm's institutional clients and its mutual funds own about 10% of the utility's stock.)
Another fund holding, Great Plains Energy, is a midsize utility serving eastern Kansas and western Missouri. It recently received permission to raise rates from state regulators after completing construction of a clean coal plant and making significant investments in other environmental equipment. Over the long term, its strategic location in the wind-rich Midwest will provide the opportunity to take advantage of wind generation.