Q:  What are the core beliefs behind your money management?

A: We manage the fund with a focus on total return, which represents a combination of dividend income and capital appreciation. Our goal is to provide aboveaverage total return relative to the utility group with below-average risks.

We believe in long-term investing and we evaluate companies based on our expectations for the next one to three years, not based on their performance over the next one or two quarters. It is difficult for any investor to time the market and we don’t try to predict the near-term volatility because that’s a dangerous game. We’d rather look at the core qualities of the companies to see whether they’re undervalued or overvalued.

We don’t try to chase market momentum. If we make sound investment decisions and buy quality companies selling at a discount to intrinsic value, the strategy should provide good total return over time.

We believe in diversification across the utilities sub-sectors and we have a broad view on the sector. For most people, utilities mean just electricity. In our prospectus utility groups include electric, natural gas distribution, telecommunication, both long-distance and wireless, cable, and renewable energy companies.

We invest both domestically and internationally, and international investing is an important part of our philosophy. We believe that the diversification reduces the risk and improves the performance over time. It also gives us a larger opportunity set to choose from.

Q:  What are the core qualities of the companies that you consider worth investing?

A: We look for the leaders in their respective field. It might be the leaders in terms of geography, as in the case with distribution companies, or the leaders in terms of product, distribution, or customer base. We also look for companies with good quality fundamentals, strong balance sheets, and companies that can grow their dividends over time.

We look for companies with above-average dividend growth potential.

Good quality balance sheets for us means long-term debt/total capitalization ratio of less than 55%. Cash flow generation is another important element. We not only look for companies that can consistently generate free cash flow, but also for companies moving into positive free cash flow positions.

Q:  How would you describe the differences between the different types of utility companies from an investing point of view?

A: We apply different standards for the evaluation of distribution and generation companies because those two businesses vary in terms of predictability. The distribution companies work in specific geographic regions where they have their pipelines or transmission networks. That gives them regional advantage because they usually don’t have competing networks, certainly not the electricity distributors. Because the income and the cash flow of those companies tend to be very stable, they can handle more debt and we tend to be more flexible with our debt/capital rule. The dividend payout ratio that we look for can vary from nothing for a high-tech company to 70% for a regulated company.

While the distribution companies tend to be fairly consistent, the generation companies are much more cyclical. They used to be regulated but that has changed over the past 10 years. For generation companies, we try to understand where we are in the cycle. At the beginning of a cycle, we generally would expect prices to go up. We also define where we are in terms of capacity and utilization.

Q:  How do you translate this concept into an investment process?

A: We’re longer-term oriented and we use both a top-down and a bottom-up approach. We analyze each company looking for specific characteristics but we also analyze the overall industry to develop an understanding of where we might be in the cycle.

For telecom and generation companies, we evaluate the cyclicality of the earnings, while in the fairly stable distribution business the cycles are mainly related to interest rates. In a rising interest rate environment, we tend to be less bullish on distribution companies. Overall, we don’t try to predict quarter-to-quarter changes, but we develop a general view if interest rates are trending, flat, up or down. The macro view and the decision of where we are in the cycle are important parts of our strategy.

Q:  Regarding the telecom companies, do you also consider the changes in the capital expenditure levels?

A: Yes, that’s an important part of our analysis. When the capex is rising rapidly, we tend to be more negative on the industry. In periods when telecoms are spending heavily, the return on investment is going to decline and the cash flow may be negative. We prefer periods when the capex trend is downward because there is more free cash flow generation and the companies can use it to support higher dividends.

Q:  Do you find opportunities in water companies as water can be a precious commodity?

A: Yes, but there are few investable water companies. But we do take a good look at the water companies, the capex environment, and the regulatory cycle.