Reaves Utility Income Fund: It’s Been A Tough Year
UTG is a well-regarded utility CEF. But that won’t protect you or it from losses in difficult markets. However, that doesn’t mean it isn’t a good fund. Reaves Utility Income Fund’s (NYSEMKT: UTG ) net asset value is down roughly 11.5% so far this year. That’s a rough showing, and investors have clearly been spooked, sending the market price of UTG down nearly 13% over the same span. That’s increased the discount of this well-respected fund, but not enough to scream buy… yet. What it does UTG is a utility fund, but takes a broad look at the space, including everything from the typical electric utility to telecom to oil to railroads. While utilities do make up around half the portfolio, the broader exposure means that UTG has more to offer on the diversification front. That can be a good thing, but also a bad thing — for example, owning oil and gas companies hasn’t been the best thing since the middle of 2014 when oil prices began to crumble. Still, Reaves has a long history of successfully navigating the various markets in which it invests. For example, over the trailing ten years through August, UTG’s annualized net asset value, or NAV, return is roughly 9%. That compares favorably to Vanguard Utilities ETF (NYSEARCA: VPU ), where the return was around 6.7%. Both numbers include reinvested distributions. And to UTG’s credit, its dividend has never included return of capital. It has always been made up of either income or capital gains. That said, capital gains have been a big piece of the puzzle in recent years, so a market downturn could make it harder for the CEF to maintain that streak. But if history is a guide, it will do whatever it can to keep return of capital to a minimum. The fund’s fees are a little high, with the expense ratio historically floating between around 1.5% and 2%. However that includes the interest costs associated with UTG’s use of leverage (it’s about 25% levered). The actual management fee has normally trended in the 1.2% area. That’s still high compared to an exchange traded fund like VPU, but not unreasonable for a closed-end fund. And for many investors, the added return will be more than worth the added expense. Yield is another place where UTG shines. While it’s nice that the fund has never dipped into capital to pay a distribution, the bigger number is that the yield is around 6.5%, paid monthly. That compares to VPU’s far less impressive yield of around 3.5%. Again, for the right investor, the added cost may be worth the added income benefit. And at 6.5% the yield isn’t so high that you have to fear a divided cut, which is a real risk for funds that yield 10% or more during a market downturn. So what’s going on now? But this year hasn’t been a good one for UTG. To be fair, that’s more a function of the market than the managers. UTG’s around 11.5% year-to-date NAV decline is roughly in line with the drop shareholders of VPU have experienced. In other words, Reaves Utility Income Fund is doing okay in a tough environment. However, spooked investors don’t usually care about things like that. They get scared and sell. So investor sentiment has been worse than performance, as shown by the nearly 13% drop in UTG’s market price. Which has left the fund’s discount to around 3%. That said, UTG isn’t a screaming buy. True, it is a good fund and anyone looking at the space should clearly be considering it. But the average discount over the past six months is around 4.7%, and the average over the past three years is around 4.7%. Based on its history, the discount is clearly still within a reasonable range. However, looking at the fund’s history a little closer, a discount in the 7% to 8% range is possible and would be a much better opportunity. This, however, doesn’t happen often. In fact, there are times when Reaves Utility Income Fund traded at a premium to its NAV. That’s not the norm for a closed-end fund. But Reaves has a great history, increasing the disbursement eight times since the fund started paying dividends in 2004 without a single distribution cut. And, as noted above, the distribution has never included return of capital. Add in the solid total returns and you can see that there’s a good reason why investors like the fund. Watch this one If you are looking for a diversified utility fund right now, you should consider UTG. It is truly a good fund that you should be comfortable owning for a long time. That said, if you are looking for a bargain, I don’t think UTG is there just yet. But with market volatility kicking up, keep a close eye on UTG, because fickle investors may just give you the opportunity to buy in on the “cheap.” Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.