Target Rock Sustainable Utility Indexes Underperform in Third Quarter of 2012 But Remain Good Long Term Investments

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Target Rock Advisors, LLC (TRA) today released the third quarter 2012 update and analysis of its ten energy utility industry Sustainability and ESG (Environmental, Social and Governance) Indexes.

Target Rock Advisors, LLC (TRA) today released the third quarter 2012 update and analysis of its ten energy utility industry Sustainability and ESG (Environmental, Social and Governance) Indexes. Generally utility stocks underperformed the broader market in the third quarter after relatively strong first half of the year. Although the third quarter showed a short- term reversal of the positive long-term relationship between utility sustainability and stock market performance, this relationship did hold for the 10 years ended September 30, 2012.

In Q3/12 the TRA Composite Utility Index posted a -0.4% total return, while the Dow Jones Utility Average, S&P Utilities, and Philadelphia Utility Index came in at -1.2%, -1.5%, and -2.3% respectively. The broader market fared much better; the S&P 500 and Dow Jones Industrial Average posted Q3/12 total returns of 5.8% and 4.3% (TRA’s calculation methodology for all total returns assumes dividends are taken as cash and not reinvested).

“The third quarter underperformance of utility stocks is in large part attributable to a combination of natural profit-taking after a stellar first half and the negative effects the Federal Reserve’s latest round of quantitative easing (QE3) has on such a relatively low-risk defensive sector,” said Kyle Rudden, co-founder of Target Rock Advisors.

At the end of Q2/12 the TRA Composite Utility Index had posted a first half total return of 5.5%, with the S&P Utilities, Dow Jones Utility Average, and Philadelphia Utility Index averaging 4.8%. “And that was on the heels of a period of substantial utility sector outperformance since August of 2011. The sector has had a nice ride -- particularly the more liquid, stable, large capitalization companies -- and valuations reflected that at the beginning of the third quarter,” Kyle Rudden added. “Throw in QE3, which increases investor confidence and appetite for high risk/return investments, and suddenly the defensive characteristics of utility stocks aren’t as appealing. The anticipatory effects of QE3 started working on this sector even before it became official on September 13.”

In addition to the relative underperformance of the utility sector, the third quarter saw a short-term reversal of long-term positive relationship between sustainability performance and stock market returns.

“Historically, our research and analysis has demonstrated a pronounced positive long-term relationship between sustainability performance and stock market return -- i.e., more sustainable utilities tend to outperform less sustainable companies over the long-term,” said Richard Rudden, Managing Partner and co-founder. “We have, however, observed the occasional short-term period during which this relationship falls apart. Those periods are the exception, temporary, and associated with a classic market correction. The third quarter of this year is case in point.”

For the three month period 7/1/12-9/30/12 the historically underperforming TRA Low Sustainability and TRA Low ESG (Environmental, Social and Governance) Indexes outperformed with total returns of 1.2% and 1.0% respectively, while the historically outperforming TRA High Sustainability and TRA High ESG Indexes were among the worst performing for the quarter at -1.6% and -2.0%.

“I don’t think this has anything to do with sustainability per se,” Kyle Rudden said, “but rather the fact that more sustainable utilities have so materially outperformed less sustainable utilities that they were ripe for a correction. Utility investors are increasingly embracing the importance of and taking into account sustainability issues, but the vast majority are still income or value investors first. So it makes sense that they would be willing -- barring major sustainability related grievances -- to move into cheaper utilities with more near-term upside.”

The mean long-term EPS growth estimate for TRA High Sustainability Index components is 3.7% versus 5.4% for the TRA Low Sustainability Index. At the beginning of Q3/12, the High Sustainability Index was trading at a P/E Growth ratio of 4.5, close to a 30% premium over the Low Sustainability Index PEG ratio of 3.5 at the beginning of the quarter. “The Low Sustainability Index carries substantially more long-term risk than the High Sustainability Index, but it’s probably not 30% riskier over the next six months or so,” Kyle Rudden concluded.

The full report is available at

About Target Rock

Target Rock is dedicated to the rigorous study and implementation of sustainability policies and practices within the utility and financial industries. The Company’s mission is to provide data, information, analytical systems and deep sector-specific technical expertise that identifies areas for improved performance and helps utility companies achieve their sustainability objectives with favorable social and economic outcomes. For more information visit

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