2018 Year-End Letter, Part 3: Sectors: Utilities and REITs


We stuck with our zero target to utilities throughout 2018, despite the end of year economic uncertainty that saw the sector slip into the green with a 1.4% gain on the year. While a 1.4% gain sounds like nothing to write home about, it did land the sector in 2nd place on the year, behind healthcare (+3.4%).

While a general slowdown in growth (and technical setups) did have us increasing our healthcare and staples exposure during the year, we simply were not compelled to wade into the ultra interest rate sensitive utilities sector. And, frankly, we’re still not compelled to, even at this juncture.

Should the economic cycle play out as we believe it ought to, the next recession is still a ways off. Assuming current headwinds abate (the strongest being the trade war), we believe that the Fed will be back on track — likely by late 2019 — with measured Fed funds rate increases. And before the Fed reengages with its tightening bias we’ll see yields rise as investors sell bonds in anticipation of a pickup in inflation, as well as an ultimate Fed rate hike or two, or three.

Also, beyond the current economic cycle, make no mistake, renewable energies pose a real threat to the business models of your traditional utility companies.


While we counsel clients and often endorse their specific real estate investment ideas, such situations generally involve taking positions in opportunities within their respective communities. The way we buy real estate within client portfolios is through publicly traded real estate investment trusts (REITs).

While in the past we’ve maintained as high as a 10% target weighting to REITS, for now we remain at zero; for the simple reason that they, as a group, have been the definition of interest rate sensitivity. And, per our utilities sector summary (despite the of late slower economic growth rate and easier Fed), we believe that the risk to interest rates going forward remains ultimately to the upside.


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