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Essential Services Q3 Update

09/13/2013

As the third quarter winds down, we offer our near-term outlook on the four global essential services sectors in which the Virtus Global Dividend Fund invests:

Communications – We remain underweight the communications sector. Fundamentals for European integrated telecom companies continue to be difficult. Despite what appear to be attractive valuations, we are cautious given our desire for sustainable, growing dividends. U.S. telecom fundamentals are somewhat more stable, with good cash flow generation supporting solid dividends. Yields provide some attraction, but overall we believe valuations remain a bit stretched even though the stocks have underperformed the broader market so far in 2013. We have maintained an overweight in towers and satellite companies despite some recent stock pressure, due to their attractive long-term revenue growth profiles and high margins.

Utilities – We continue to be underweight utilities overall. However, regionally we are overweight U.S.-regulated utilities and underweight European utilities. These are positions that we have maintained for some time. Even though European utilities showed some signs of life last quarter, we remain concerned about political and regulatory risks such as those that recently impacted Spanish companies. We are more comfortable with regulation in the U.S., and we have limited our exposure to power price-sensitive names given the bleak outlook for U.S. power prices.

Energy – Our overweight stance on energy has not changed given attractive fundamental drivers tied to increasing shale oil and gas production. We believe our holdings provide strong demand prospects as the economy improves, along with attractive earnings and dividend growth potential. We have limited commodity exposure due to our bias toward fee-based business models.

Transportation – We are maintaining our overweight in this sector. European airport and toll road performance turned around last quarter as prospects for the economy improved on the back of the ECB’s interest rate cuts. Toll traffic has remained weak but may be finding a bottom. Airports have fared better, primarily due to the international component of the business.

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.