Fund managers shun telecoms and utilities

Utilities and telecoms are out of favour with European fund managers. Tight competition and high investment costs in a well-developed market are just some of the reasons given by investors for avoiding the sector.

Thorsten Winkelmann, a Citywire AAA-rated manager focused on picking stocks with growth potential, says he’s avoiding both utilities and telecoms.

‘We are keen to identify companies who are able to deliver growth in cash flows and earnings over a complete market cycle, and within telecoms and utilities we don’t have a single company,' Winkelmann explains. 

'I wouldn’t say that there isn’t value, if I was a value investor I would probably find some companies that look attractive in the short term, especially when you take a look at dividend yields or some of their shorter-term cash-flow patterns.’

However, he is particularly cautious about investing in the telecoms sector.

‘In general, especially when looking at telecoms, they are operating in a declining environment. You have so much competition from new segments like the internet, mobiles and satellite that you are fighting for market share and typically you are fighting on price. You have to spend so much on capital expenditure to keep up with the latest technology that over the mid to long term I don’t see any of these companies being able to structurally grow.

‘The same holds true for utilities, although German companies like E.ON and RWE score best when it comes to dividend yields. But what does it mean to a dividend investor if the company is paying a dividend out of substance and not out of cash flow? From my perspective it’s a somewhat unhealthy place to go.’

Winkelmann oversees the Allianz RCM Continental European and the Europe Equity Growth funds. The Continental European portfolio has returned 60.8% over the past three years, compared with the benchmark FTSE Europe excluding UK's total return of 41.7%.

His view echoes that given by European fund managers in a Bank of America Merrill Lynch survey from earlier in April, which revealed that their biggest underweight was utilities, with 45% of managers avoiding the sector.

Financials are also highly unpopular, with 35% underweight, and telecoms are shunned too, with 17% underweight the sector in their portfolios.

Growth potential in Prudential

However, Winkelmann notes that he has found some financial businesses that he thinks will be able to grow and are worth investing in. 

'Within financials we have Prudential (PRU.L), which we observe as structurally growing especially due to their Asian exposure but also their US business and cash-cow UK businesses,' he says.