* 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 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.
U.S., UK OUTPERFORM
Out of the fund's total assets, around 40 percent are in
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
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
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
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.