The utility sector features low risk monopolies and higher risk power generators and suppliers. The monopolies include water companies and groups owning transmission & distribution infrastructure. National Grid falls into the latter camp and has delivered strong long-term returns for investors.

In the fable of The Tortoise and the Hare a race between the two sees the Tortoise emerge as the winner. While the Hare is the fastest he is also overconfident with his downfall being the nap he takes during the race.

A similar story can be seen in the stock market with investors often overconfident on racy sectors like technology and resources. This means that they tend to underperform the slow and plodding sectors like regulated utilities.

Empirical research has borne this out with low risk stocks (low volatility) outperforming high-risk stocks (high volatility). In theory the opposite should be the case with investors rewarded for taking on higher risk.

The explanation may be that higher risk sectors don’t retain and compound value over time. In the tech sector, for example, rapid change can hit the leading stocks while the resource sector suffers when commodity prices tank.

Against this backdrop investing in stock market tortoises may be a sound long-term bet. National Grid is the UK’s largest utility group and has seen its regulated transmission infrastructure make it a reliable investment tortoise.

National Grid plods through the financial crisis

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Will UK regulated utilities remain in favour?

The regulated utility sector (water firms and transmission businesses) offers a similar profile to bonds for investors. However, an advantage of listed utilities is that they can increase their dividend payments over time.

Regulated utilities typically retain part of their profits to grow their regulated asset base. The regulator also tends to allow for price increases because utilities need to offset cost pressures and develop new infrastructure.

Secure and growing dividends therefore make regulated utilities attractive core portfolio holdings. The sector has also rallied since the start of the financial crisis due to falling Western government bond yields.

The 10-year yield on UK government debt is currently 2.08% while the 30-year yield stands at 2.79%. As such a regulated utility offering over a 5% yield offers a compelling alternative.

We note that the Bank of England governor, Mark Carney, has recently said in a speech that the first increase could be “at the turn…

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