DISTRIBUTION / MERGING UTILITIES

The Distribution/Merging Utilities portfolio is a specialty strategy structured to benefit from consolidation and convergence in the utility industry. Focus is on investments in public securities of small and mid-capitalization utility companies that we believe are both undervalued and potentially subject to acquisition. In our view, this is one of the most conservative investment opportunities in utilities and infrastructure. Holdings are typically local monopolies and low-correlated investments that provide opportunity for 1) above broad market averages cash flow from dividends, 2) growth of income and principal and 3) additional alpha from a transaction premium. What's more, investors are paid to wait while holding a high-quality portfolio with an attractive yield.

Investment Philosophy

Deregulation and competition within the industry are the drivers behind consolidation of the utility sector. The trend began in 1997, with the repeal of the Public Utility Holding Company Act (PUHCA), which paved the way for nonutility purchasers to participate in acquisition of utility companies. Since that time, many utility acquisitions and mergers have occurred. We believe that the small and mid-sized gas and electric distribution companies are the most attractive acquisition candidates.

Investment Objective

We seek to generate alpha by investing in utility companies that we evaluate as likely takeover candidates and that offer a substantial potential price appreciation based on their projected acquisition value.

Composite Inception Date: December 1998
Portfolio Manager: MHI Investment Team

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