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A Giant Safe Haven

Even when stocks appear to be selling off across the board, as was the case last week, there’s usually at least one corner of the market that offers a safe haven.

In an extended downturn, such as the one that occurred during the Global Financial Crisis, utilities typically do a superior job of holding their value relative to the broad market.

Of course, that doesn’t mean utilities didn’t fall during that tumultuous period. They just didn’t decline by nearly as much as the rest of the market—and that can make all the difference between building enduring wealth and destroying it.

For instance, investors in growthier fare suffered losses of between 40% and 60% in 2008, while Utility Forecaster’s average portfolio was down just 18.2% (according to The Hulbert Financial Digest).

And while growth investors had little with which to console themselves from the sea of red in their portfolio statements, we continued to quietly collect our dividends.

Lower losses and a steady stream of dividends helped us keep our heads down and our portfolios fully invested throughout the downturn. But many growth investors finally threw in the towel at the worst possible moment, by dumping their stocks as the market hit bottom and locking in permanent losses.

In a short-term correction, such as last week’s steep selloff, anything can happen. And not all of the utility subsectors, including power, water, telecom and natural gas, performed the same.

In fact, many utilities actually fell harder than the market. While such a short-term period isn’t necessarily instructive about what to expect over medium- to longer-term periods, the action during those few days may offer some clues about what to expect as trading activity starts to pick up in the weeks ahead.

We believe that most retail investors likely held their utility stocks through the selloff. After all, investors can’t afford to ditch reliable dividend payers if they depend on them for current income.

That means large, institutional money managers may have been responsible for most of the action among utilities. And at least some of these asset managers are probably anticipating even greater volatility in the fall and repositioned their portfolios accordingly.

The stocks they seemed to favor are firms with the scale and diversity of operations to endure just about any economic environment.

Perhaps most surprisingly, the telecom sector did the best by losing the least, followed by natural gas utilities, water utilities and electric utilities (see chart below).

Telecoms Hang On, While Others Just Hang

2015-09-03-U&I-Chart A

Source: YCharts

Regardless of sector, the biggest names were also the biggest beneficiaries of investors’ flight to safety. For example, telecom giant AT&T Inc. (NYSE: T) managed to keep pace with the S&P 500, even while other stocks fell harder.

With a market capitalization of over $200 billion and more than 100 million customers, few companies boast AT&T’s scale and diversity of operations, with businesses as wide-ranging as telephone, broadband Internet and satellite TV.

AT&T’s recent acquisition of DirecTV gives the U.S. wireless provider an important foothold in Latin America, where the satellite TV provider has 18 million subscribers.

Latin America is one of the largest buyers of Spanish-dubbed TV series and movies from the U.S., the U.K. and Australia. AT&T says that in Latin America only 40% of households subscribe to paid-television services (versus 90% in the U.S.), and the Latin American middle class is its fastest-growing group of customers.

Of course, in emerging markets such as Latin America, there could be headwinds as incomes decline on currency devaluations. But we believe AT&T’s strong domestic presence gives the firm the platform necessary to make significant inroads into new markets at a time when potential competitors are weak–and that will pay off when growth returns.

And the tech revolution is bigger than just telecom. Companies such as AT&T are on the front lines of a revolution in business opportunities for global firms. As smartphone adoption spreads across emerging markets, this will create gateways to selling other products and services.

For subscribers, we highlight which of our favorite electric utilities held up best during the selloff and continue to trade at compelling values.

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