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Fund managers shun telecoms and utilities

Thorsten Winkelmann, AAA-rated manager of the Allianz RCM Continental European fund, explains why he’s out of telecoms and utilities.

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.

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7 comments so far. Why not have your say?

Tony Peterson

Apr 24, 2012 at 07:04

It is always very helpful to know what sectors fund managers are avoiding, as this keeps prices of the unfavoured equities low and their yields high, with always the possible of capital appreciation when circumstances change and fund managers begin to favour such stocks.

It is likely that I will be adding to our Vodafone and United Utilities holdings next.

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Apr 24, 2012 at 07:24

@Tony - yes, I fully agree, If the hot money is thundering off in a different direction and thus dumping these companies, then there are almost certainly going to be good finds for long-term income/value-oriented investors.

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Tony Peterson

Apr 24, 2012 at 07:43

Nicely put, sgjhaghsdg.

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Patrick Moore

Apr 24, 2012 at 11:36

Couldn't agree more. As a retiree looking for income off my portfolio and the odd opportunity to add to my investments I like articles like this.

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J Thomas

Apr 24, 2012 at 13:52

My shares in SSE pay for my entire annual gas and electricity consumption with their very attractive dividends. They are also full ripe for foreign takeover with a possible 25% premium on the current price.

Sorry Thorsten I wont be taking your advice on this occasion.

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Apr 24, 2012 at 17:57

I have also "hedged" my utility bills with utilities and my insurance bills with insurers.

Shame I can't do anything about the ever-escalating bill the council send me every year that covers emptying the bins occasionally and from time to time stamping tarmac into any potholes that have got large enough to swallow my bicycle.

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Dennis .

Apr 24, 2012 at 20:55

I have some BT shares but long suspect that long term telecoms is not a good sector to be in. The basic reason is that although the amount of data being shifted is increasing, the capability of data transmission via fibres is tremendous and there is a significant amount of spare dark fibre (unused fibres already laid in the ducts since the main cost in installing fibre is digging the trenches). Hence data transmission charges will continue to fall.

One interesting question to ask yourself is where does your terrestrial TV signal come from? Most people don't know who runs the network so is this the future for telcos?

Unless BT gets big in entertainment I can't see that they will be a worthwhile investment long term, it will be a pure commodity bit shifter.

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