PGIM INVESTMENTS | Bringing you the investment managers of Prudential Financial, Inc.
PRUDENTIAL JENNISON UTILITY FUND
FUND COMMENTARY | MARCH 31, 2017
MARKET REVIEW
Global equity markets advanced broadly in 2017’s first quarter. In the
U.S., solid economic fundamentals, including robust employment and
accelerating S&P 500 corporate profit growth, held sway over the new
Trump administration’s shaky start. A series of executive orders relaxed
or eliminated prohibitions across many industries, in some cases
accelerating specific infrastructure projects, such as the Keystone XL
and Dakota Access pipelines. Major legislative accomplishments proved
more elusive. Republican leadership in the House of Representatives
withdrew proposed legislation favored by both House Speaker Paul
Ryan, and the White House to repeal the Patient Protection and
Affordable Care Act (ACA) after failing to gain sufficient support to pass
it. Action on trade, immigration, and national security likewise fell short
of campaign rhetoric.
The U.S. dollar declined slightly against major world currencies, oil
prices fell, and gold and other major metal prices rose. Rising growth
expectations drove the yield on 10-year U.S. government bonds to
2.5%, a new cycle high. Yields fell back at quarter-end, and the Federal
Reserve raised the U.S. federal funds target rate 25 basis points (to
0.75%-1.00%) with further tightening promised, reflecting increased
inflationary expectations.
UK Prime Minister Theresa May formally invoked Article 50 of the
Lisbon Treaty, the legal mechanism that will end Britain’s membership in
the European Union (EU). The sequence of negotiations are in dispute,
with May calling for the future UK/EU partnership to be decided together
with terms of the exit, and European Council President Donald Tusk
insisting that the first phase must focus only on an orderly withdrawal.
Incumbents defeated right-wing populists in German and Dutch
elections, but upcoming votes in France and Italy could indicate growing
appeal for more inwardly focused, less globally inclusive political
agendas that break with the post-World War II political and economic
order.
MONTH
The Fund posted positive returns, slightly outperforming its S&P Utility
Total Return Index during the month of March.
On an absolute basis, the Fund’s electric utilities, multi-utilities and
specialized real estate investment trust (REIT) holdings, all positively
contributed to performance during the month. Conversely, holdings
within the integrated telecommunication services segment and the water
utilities industry all detracted from absolute performance during the
period.
QUARTER
The Fund posted positive returns, performing in-line with the S&P Utility
Total Return Index during the first quarter of 2017.
On an absolute basis, the Fund’s electric utilities, multi-utilities, and
specialized REIT holdings, all positively contributed to performance
during the quarter. Conversely, our holdings within the integrated
telecommunication services segment detracted from both absolute and
relative performance. An overweight allocation to the oil & gas storage &
transportation segment also detracted from relative performance during
the period.
Top absolute contributors during the period included electric utilities
PG&E Corporation, renewable electricity firm NextEra Energy Partners,
and its electric utility parent-company NextEra Energy, Inc. Top absolute
detractors included oil & gas storage & transportation firm, Williams
Companies,
diversified
telecommunication
firm
Frontier
Communications, and oil & gas storage & transportation firm SemGroup
Corporation.
The S&P 500 Utility Total Return Index is composed of traditional
regulated utility companies, whereas the Fund’s holdings generally
encompass traditional regulated utility companies as well as energy
infrastructure, telecom services, and telecom infrastructure companies.
The Fund may also selectively invest in non-utility companies.
KEY CONTRIBUTORS
 PG&E Corporation
 NextEra Energy Partners, LP
 NextEra Energy, Inc.
PG&E Corporation is an electric utility company whose primary
operating subsidiary is Pacific Gas and Electric Company. The
company, through its subsidiary includes electric and natural gas utility
operations in northern and central California. Pacific Gas and Electric
Company generates electricity and provides electricity transmission and
distribution services throughout its service territory in northern and
central California to residential, commercial, industrial, and agricultural
customers. Pacific Gas and Electric provides natural gas transportation
services to customers, which include small commercial and residential
customers and to non-core customers, which include industrial,
commercial, and natural gas-fired electric generation facilities that are
connected to the Pacific Gas and Electric’s gas system in its service
territory. We favor the company for its long-term rate base growth that
should prove reasonably durable in our view.
NextEra Energy Partners, LP is a limited partnership formed to
acquire, own, and operate contracted clean energy projects. The
company, through its limited partnership interest in NextEra Energy
Operating Partners, LP, owns a portfolio of contracted renewable
generation assets consisting of wind and solar projects totaling over
1,000 MW of contracted, clean energy projects in North America and is
a subsidiary of NextEra Energy, Inc. We favor the company as the
parent-holding entity has ample debt capacity to provide support for its
high-quality backlog over the next few years.
PRUDENTIAL JENNISON UTILITY FUND
MARCH 31, 2017
NextEra Energy, Inc. is an electric power company in North America
which operates through its wholly owned subsidiaries, Florida Power &
Light Company and NextEra Energy Resources, LLC. The company has
electric generating facilities located in 27 states in the U.S. and four
provinces in Canada. The company’s main operating segments consist
of: Florida Power and Light, an electric utility engaged primarily in the
generation, transmission, distribution, and sale of electric energy in
Florida; and NextEra Energy Resources, which owns, develops,
constructs, manages, and operates electric generating facilities in
wholesale energy markets primarily in the U.S., as well as in Canada
and Spain. We favor the company for its above-average rate base and
customer growth potential along with its preeminent status as a leading
renewable energy player in the U.S.
KEY DETRACTORS
 Williams Companies
 Frontier Communications
 SemGroup
Williams Companies is an integrated, large-scale, natural gas
infrastructure company that explores, produces, transports, sells, and
processes natural gas and petroleum products. Williams Companies is
the parent-company and General Partner of Williams Partners, which is
engaged in the business of gathering, transporting, and processing
natural gas, and fractionating and storing natural gas liquids (NGLs). We
believe the company, along with its subsidiaries, is a gas behemoth with
premier Northeast and Gulf Coast positioning, which should benefit from
a rise in needed transportation projects. With its attractive footprint in
fast growing shale basins – the Marcellus, Utica, Eagle Ford, and
Permian Basin, we believe Williams will be a principal beneficiary of
rising demand for natural gas and NGLs.
Frontier Communications is engaged in providing services
predominantly to rural areas and small and medium-sized towns and
cities in the U.S., offering a range of voice, data, and TV services and
products. Shares have suffered recently due to the cautious market
sentiment following two difficult quarters integrating the acquisition of
Verizon’s wireline assets. Shares have suffered recently as the
company reported another disappointing quarter, missing its $1B
earnings before interest, taxes, depreciation, and amortization (EBITDA)
target. It appears the company has resorted to more aggressive
promotional pricing, causing another source of growth concerns.
Additionally, management had walked back their initial EBIDTA
guidance and it seems management has come to the realization there
might not be a quick fix for the more than likely eroding trends and
competitive pressures within its markets. As such, we have reduced our
position over the quarter.
SemGroup is primarily focused on the gathering, transportation,
storage, distribution, marketing, and other midstream services to MidContinent and Rocky Mountain independent oil and gas producers and
refiners. The company operates storage terminals and marine facilities
in the UK and a network of liquid asphalt terminals throughout Mexico.
SemGroup holds a majority interest in Rock Rose Midstream, a master
limited partnership (MLP) as well as a significant interest in NGL Energy
Partners. We favor the company as it drops down assets to its MLPs
and in turn could see growth potential looking ahead, in our view.
PORTFOLIO OUTLOOK
True to our investment philosophy and process, we continue to build the
Fund from a bottom-up perspective, based on our research-driven
assessment of individual companies’ long-term fundamentals and
earnings prospects.
Within the utility sector, we continue to prefer regulated electric utilities
with solid dividend yields, above-average projected earnings and/or
dividend growth, and operating in constructive regulatory environments.
We believe there is a secular trend of rising global demand for
renewable energy supply and subsequent transmission investment
needed to tie those cleaner resources into the grid, as well as to
modernize the aging grid infrastructure to absorb the intermittency
nature of renewable generation. In our opinion, the trend for increased
investment in renewable energy is supported by two broad and enduring
themes: (1) pronounced reductions in the cost of renewable energy,
driven by continued technological advancement; and (2) increasing
public policy support – on a global scale – for renewable investment
driven by concerns over greenhouse gas emissions, energy security,
and most recently, job creation.
Regarding energy infrastructure, oil and natural gas prices have
rebounded from their early-2016 lows and North American oil & gas
producers (who represent a very significant portion of the customer
base for energy infrastructure companies) are in a much stronger
financial position today than they were at the beginning of the year.
Such developments bode well for the prospects of the North American
midstream industry and we believe that outlook will improve further still
in 2017 and beyond as supply and demand for oil and natural gas move
closer to equilibrium. Through a reduction in field service costs and
improvements in drilling & completion techniques, we believe oil & gas
producers are quickly recalibrating their operating cost structures so
they can grow production profitably at lower commodity prices –
production growth which, in turn, will drive demand for incremental
infrastructure investment. Our energy infrastructure investments tend to
exhibit many of the following characteristics: a very high degree of feebased gross margins, with little to no direct commodity price sensitivity;
asset platforms in the core areas of the lower-cost production basins
with a current preference for natural gas over oil; under-levered balance
sheets; and a high degree of visibility and transparency into their
backlog of growth projects.
In telecom services, we like wireless tower operators. In our opinion,
these companies should continue to benefit from increasing wireless
mobile users and continued growth in data usage on wireless networks.
While rising interest rates have been a headwind for tower valuations
(largely due to the pressure on the REIT sector as a whole), we believe
the tower operators continue to present an attractive investment
opportunity given their ability to generate free cash-flow and the relative
visibility of earnings due to a recurring revenue business model. We
also like cable broadband providers. As the volume of digital data usage
and transmission continues to increase across societies, we believe
cable broadband providers are well-positioned to capitalize on strong
growth in demand for ever-increasing broadband speeds, given what we
see as sustainable competitive advantages over satellite- or wirelessbased broadband providers. Additionally, we believe cable broadband
providers can also generate attractive levels of free cash-flow, which
can be returned to shareholders through dividends and share
repurchases.
PRUDENTIAL JENNISON UTILITY FUND
MARCH 31, 2017
AVERAGE ANNUAL RETURN AS OF 3/31/2017
3-year
5-year
10-year
Since
03/01/1996
11.29
6.58
12.52
6.22
10.45
7.06
11.31
12.10
6.69
7.86
11.29
6.58
12.52
6.22
10.45
Total Returns (without sales charges)
YTD
1-year
Prudential Jennison Utility Fund Z
6.72
S&P Utility Total Return Index
6.39
―
SEC Standardized Returns (with sales charges)
Prudential Jennison Utility Fund Z
Past performance does not guarantee future results. Current performance may be lower or higher than the past performance data quoted.
Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than original
cost. For the most recent month-end performance go to pgiminvestments.com. Gross operating expense: Class Z, 0.55%.
Class Z shares are available to institutional investors through certain retirement, mutual fund wrap, and asset allocation programs, and to
institutions with an investment minimum of $5,000,000. Performance by share class may vary. Other share classes, which contain either
a sales load or a contingent deferred sales charge, are also available. These expenses could lower total fund return. Please see the
prospectus for additional information about fees, expenses, and investor eligibility requirements.
Annualized returns without sales charges describe the return to the investor before any sales charges are imposed. SEC standardized return describes the return to the investor after
maximum sales charges are imposed. All returns assume share price changes, as well as the compounding effect of reinvested dividends and capital gains. Returns may reflect fee
waivers and/or expense reimbursements. Without such, returns would be lower. Performance by share class may vary. The performance data featured represents past performance for
a period of less than one year. While past performance is never an indication of future results, short periods of performance may be particularly unrepresentative of long-term
performance for certain types of funds.
The Fund may not be appropriate for all investors. The Fund focuses its investments in the utility sector, thereby increasing its vulnerability to any single economic, political, or regulatory
developments. The Fund is nondiversified, so a loss resulting from a particular security or sector will have a greater impact on the Fund's return. The Fund may invest in foreign
securities, which are subject to currency fluctuation and political uncertainty; short sales, which involve costs and the risk of potentially unlimited losses; and derivative securities,
which may carry market, credit, and liquidity risks. These risks may result in greater share price volatility. There is no guarantee the Fund's objective will be achieved. Emerging markets
are countries that are beginning to emerge with increased consumer potential driven by rapid industrial expansion and economic growth. Investing in emerging markets is very risky due
to the additional political, economic and currency risks associated with these underdeveloped geographic areas. There is no guarantee dividends will be paid.
The following are the percentage of total net assets represented by the above mentioned holdings as of 3/31/2017: PG&E Corporation (4.78%), NextEra Energy, Inc. (4.43%), Williams
Companies (2.83%), NextEra Energy Partners, LP (1.78%), SemGroup Corporation (0.99%), Frontier Communications (0.16%), Williams Partners (0.00%), Verizon (0.00%), Rock Rose
Midstream (0.00%), NGL Energy Partners (0.00%). Holdings are subject to change.
S&P Utility Total Return Index The Standard & Poor’s (S&P) Utilities Index is a market cap-weighted index of natural gas and electric companies. Standard & Poor’s 500 (S&P 500)
Index is an unmanaged market capitalization-weighted index of 500 stocks of large U.S. companies. Shanghai Composite Index is a stock market index of all stocks (A shares and B
shares) that are traded at the Shanghai Stock Exchange. MSCI All Country World Index is an unmanaged free float-adjusted market capitalization weighted index that is designed to
measure the equity market performance of developed and emerging markets. The MSCI ACWI consists of 46 country indexes comprising 23 developed and 23 emerging market country
indexes.
An investment cannot be made directly in an index.
Yield-co is a dividend growth-oriented public company, created by a parent company, that bundles renewable and/or conventional long-term contracted operating assets in order to
generate predictable cash flows. Brexit refers to Britain’s departure from the European Union. The Organization of the Petroleum Exporting Countries (OPEC) is a permanent
intergovernmental organization of 13 oil-exporting developing nations that coordinates and unifies the petroleum policies of its Member Countries. Real estate investment trust (REIT) is
a company that owns or finances income-producing real estate. Article 50 is a clause in the European Union's (EU) Lisbon Treaty that outlines the steps to be taken by a country seeking
to leave the bloc voluntarily. Earnings before interest, tax, depreciation and amortization (EBITDA) is a measure of a company's operating performance.
The views expressed herein are those of Jennison Associates investment professionals at the time the comments were made, may not be reflective of their current opinions, and are
subject to change without notice. Neither the information contained herein nor any opinion expressed shall be construed to constitute investment advice or an offer to sell or a solicitation
to buy any securities mentioned herein.
Consider a fund’s investment objectives, risks, charges, and expenses carefully before investing. The prospectus and summary
prospectus contain this and other information about the fund. Contact your financial professional for a prospectus and summary
prospectus. Read them carefully before investing.
Mutual funds are distributed by Prudential Investment Management Services LLC, member SIPC. Jennison Associates is a registered investment advisor. Both are
Prudential Financial companies. © 2017 Prudential Financial, Inc. and its related entities. Jennison Associates, Jennison, the Prudential logo, and the Rock symbol
are service marks of Prudential Financial, Inc. and its related entities, registered in many jurisdictions worldwide
These materials are for informational or educational purposes only. The information is not intended as investment advice and is not a recommendation about
managing or investing your retirement savings. In providing these materials PGIM Investments is not acting as your fiduciary as defined by the Department of Labor.
Please consult with a qualified investment professional if you wish to obtain investment advice.
Mutual Funds: Are not insured by the FDIC or any federal government agency | May lose value | Are not a deposit of or guaranteed by any
bank or any bank affiliate
0263826-00012-00 Expiration: 07/31/2017