Though utilities have been an excellent safe haven, a rising-rate environment and potentially inflationary fiscal policies bring new challenges to the sector.

Utility investors have been spoiled in recent years, with most names in the sector rising in tandem regardless of their underlying fundamentals.

Although we think the inflation trade has gotten ahead of itself, monetary tightening in all its forms, whether via Federal Reserve rate hikes, a rising dollar, or a rebound in energy prices, is creating an uncertain picture for rate-sensitive securities such as utilities, as well as the economy as a whole.

That’s why we’ve been telling investors to focus on only the highest-quality names, or what we like to refer to as Alpha Utilities.

Alpha Utilities are those that can generate higher risk-adjusted returns, offer income that can still compete with rising bond yields, while remaining a safe haven in the event of unexpected economic shocks.

So what characteristics separate the Alpha Utilities from their lesser peers? Here are some of the most salient attributes:

Good Management: Every investor hopes to find companies with a solid management team, but it’s amazing how many mediocre executives manage to fail upward.

In interviewing various CEOs each year for Utility Forecaster’s special “Insider Issue,” we’ve found that executives whose companies outperformed their peers typically share three qualities: creativity, a track record of being good financial stewards, and an extraordinary passion for their customers.

Productivity Performance: Although utilities are regulated monopolies, productivity still matters. In fact, it matters a lot.

That’s why in the September issue of Utility Forecaster we reviewed how each company in the sector stacks up according to various productivity metrics.

In this era, high performance will be defined by firms that harness new distributed or renewable technologies and can earn higher returns by delivering the efficiency, innovation and tailored approach increasingly demanded by industrial, commercial and residential customers.

Financial Stewardship: Being a good financial steward is part of what makes for an effective CEO. But this quality is so important that it merits its own category.

At Utility Forecaster, we’re constantly slicing and dicing the financials of each utility and running them through various proprietary models.

Our goal is to identify financially strong utilities that can sustain and grow their dividends in almost any operating environment.

Beyond these three important areas, there are other attributes that may come to fore as we look to see which utilities will further distinguish themselves from their peers.

In a recent report by the Edison Electric Institute, the association of investor-owned utilities, industry leaders described key hurdles such as 1) rate and regulatory reform; 2) data analytics; and 3) grid modernization.

We believe the Alpha Utilities of the future will be effective in 1) developing next-generation rate structures for new technologies; 2) utilizing advancements in data analytics to retain new and existing customers; and 3) using grid modernization as a value differentiator.

There are a handful of utilities that are already well on their way toward becoming the New Alpha Utilities. In fact, one of these names is the Top Pick in our Growth Portfolio.