* U.S., UK sectors outperform on stable regulation, M&A
* EU, China utility sectors lag on euro zone economy
* Fund cautious on renewables outlook for 2012
By Nina Chestney
LONDON, Jan 17 (Reuters) - Investment trust Ecofin Water and Power Opportunities Plc (EW&PO) fell in 2011 but not by as much wider stock market indexes as strong UK and U.S. performance helped to offset weak results in Europe and China, UK-based Ecofin told investors.
The fund, which is listed on the London Stock Exchange and invests in oil and gas, electricity, water and alternative energy firms, had 537 million pounds ($823 million) of gross assets under management at the end of last year.
EW&PO was down 3 percent by the end of 2011, outperforming the FTSE All-Share Index, which was down 6.7 percent, and the MSCI World Index down 7.2 percent.
In previous years by contrast, the fund fell 4.8 percent in 2010 while wider equity indexes rose and rose by 6.4 percent in 2009 versus a 25 percent gain by the FTSE All-Share Index.
"Since the fund's launch in 2002, there was very strong performance until 2008-2009. The last three years have been challenging," Ecofin Chairman John Murray said.
About 75 percent of our outperformance (in 2011) is not due to the sector but down to our geographical allocation and sector, stock selection and FX (foreign exchange)," he added.
EW&PO shares were at 114 pence on Tuesday, up from 105 pence last November but below highs of around 190 pence in 2008.
Out of the fund's total assets, around 40 percent are in North America.
Oil and gas exploration firm Texas International Energy Partners, a privately held company that drills for mostly shale oil and gas, accounts for 10 percent of its portfolio. EW&PO itself established the firm in July 2010 and owned 87.5 percent of it.
Returns on the fund's U.S. exposure were up by 21.5 percent in 2011. U.S. utilities were the best performing sector of the S&P 500 last year as investors sought the safety of high dividend yields as U.S. bond yields fell on the worsening eurozone crisis.
However, Ecofin does not expect to increase its portfolio share significantly in the United States this year.
"We are positioning ourselves for conservative growth with a focus on the industrial sector," said its chief investment officer, Bernard Lambilliotte.
"The U.S. utility sector is attractive in terms of dividend yields, but at the same time it has become expensive again in terms of monthly earnings," he added.
The return on the fund's UK exposure was up by some 12 percent last year as UK utilities outperformed EU peers, thanks to Britain's comparatively stable regulatory framework, limited political interference and increased merger and acquisition activity.
The fund's largest UK investments are in the Pennon Group , which owns South West Water Ltd, and natural gas supplier BG Group, totaling 3.6 percent of its portfolio. The fund did not provide a figure for its overall percentage investment in the UK.
"UK utilities are still a very solid investment in our view," said senior portfolio manager Jean-Hugues de Lamaze.
"The UK sector is very correlated to gilts, meaning firms are benefitting from higher margins; there is a tradition to respect what the regulation says ... and more than 100 billion pounds of investment in power generation and transmission is required in the coming decade."
In contrast, the return on EW&PO's portfolio exposure to continental Europe was down 20.9 percent in 2011 on weak EU economic growth and power demand, overcapacity and political intervention via subsidy freezes, taxes and nuclear shutdowns.
"The clean-dark spreads are still a positive factor. They have been improving over the past six months, which should help the profitability of utilities," said Lamaze, referring to the profitability for utilities that burn coal.
The fund said it did not see any catalyst for increasing its portfolio share in Europe this year, however.
Also returns on the fund's exposure to China were down by 16.7 percent, mostly driven by market sentiment in Hong Kong, which was negatively influenced by the euro zone crisis.
Chinese investments will remain part of the fund's portfolio but will not make up more than 10 percent, Ecofin said.
The renewable energy sector had a very challenging year in 2011 as competitive manufacturing capacity in both wind and solar power led to oversupply and price falls.
Uncertainty about current and future policy in Europe and the United States tightened credit availability and power prices were flat, which reduced the competitiveness of renewables.
The Wilderhill New Energy Index fell 40 percent, compared with a 6.4 percent decline in the MSCI World Utilities Index.
The fund's renewables portfolio gave a 3 percent return, but Ecofin remains cautious about the sector this year as issues involving credit, oversupply and government support continue.
"We are less pessimistic or concerned than we were last year, because we don't see prices for the basic finished goods (wind turbine equipment or solar panels) going down very much this year," said senior portfolio manager Matt Breidert.