What a difference a year makes!

In 2015, utilities limped into the year’s end, with the three main utility benchmarks down between 3.1% and 6.3% on a total-return basis.

Of course, the broad market’s performance was similarly underwhelming that year, with the S&P 500 eking out a gain of 1.4%, including the reinvestment of dividends.

Though it had its ups and downs, 2016 was an entirely different story. The S&P generated a total return of nearly 12%, while the three main utility benchmarks returned between 16.3% and 18.2%.

If you’re keeping score, that’s the third individual calendar year since the downturn in which utilities have trounced the market.

That’s pretty unusual for a nominal bull market, but macro conditions have been anything but normal. Indeed, utilities have been major beneficiaries of the historically low interest rate environment, as well as continuing uncertainty about the true health of the global economy.

Last year was also a great year for Investing Daily’s Utility Forecaster.

Our Growth Portfolio generated a total return of nearly 24%, while our Income Portfolio equity holdings did even better, returning almost 28%.

Even the fixed-income sleeve of our Income Portfolio had a noteworthy performance, ending the year up nearly 21%.

We’ll leave it up to our marketers to tout these figures. As analysts, it’s our job to scrutinize these numbers, provide the proper context for this performance, and see if there are any lessons to be learned.

Such nuance doesn’t necessarily lend itself to salesmanship, but our approach is to dispense with marketing sheen in favor of an honest assessment of what went right and what went wrong.

What Went Right

There were a couple of big factors behind our portfolios outperforming both the broad market and the utility benchmarks, aside from the aforementioned tailwinds.

First of all, Utility Forecaster has always taken an expansive view of the utilities space. In addition to traditional utilities, such as electric, gas and water, we also cover cable and telecom companies, as well as midstream master limited partnerships (MLP).

Indeed, our exposure to the energy sector via pipeline companies such as MLPs delivered some of our portfolios’ biggest gains.

During the energy boom, a number of utilities pushed into the energy sector and got punished when the boom turned to bust.

In some ways, these companies suffered out of all proportion to their exposure to the energy sector. One such firm chose to divest its energy stake, while another firm is still exploring strategic alternatives. Regardless, both entities, which were among the worst-performing utilities in 2015, were among the biggest gainers in 2016.

Mergers and acquisitions (M&A) have also been a major theme in the utility and energy sectors. And as rates continue to rise, we could see another mad scramble to ink deals while the cost of capital remains near historic lows.

Last year, four of our portfolio holdings were acquired, three of which were relatively recent additions. Meanwhile, another recent addition is the subject of a pending acquisition. And a name we only added at the beginning of November saw its share price jump 21% higher a month later amid takeover speculation.

The biggest driver of utility sector M&A has been what we like to refer to as the Great Gas Grab. Indeed, five of the six aforementioned takeover targets are primarily involved in the transmission and distribution of natural gas.

Amid weak demand growth for electricity, utilities have been pursuing gas distribution and transmission assets as a way to add a growing, regulated earnings stream. Meanwhile, some pipeline giants are taking advantage of the sector bust to buy top assets on the cheap.

What Went Wrong

While most of our M&A plays proved to be astonishingly prescient, there was one that we ultimately got wrong when its controlling shareholder chose to walk away from a deal in favor of keeping the company a separate entity.

Here, perhaps, we were trying to be a bit too clever, and now we’re stuck with a conventional turnaround play.

Still, thanks to the benefits of diversification, being wrong in this case only cost our portfolio about 0.4 percentage points, at most, in terms of performance.

What Went Right After Going Wrong

You may also be wondering how on Earth the fixed-income sleeve of our Income Portfolio returned nearly 21%, compared to 2.5% for the broad bond market.

In this case, we have to concede that we hold a number of riskier credits than we’d prefer. That includes the debt of some MLPs that suffered mightily during the energy crash, as well as the high-yield notes of a heavily levered telecom, among others.

Several of these securities started 2016 trading well below par. In fact, a couple of bonds gave us an absolutely gut-churning experience, which is not something that should be characteristic of a fixed-income portfolio.

We’ve resolved to overhaul our bond sleeve, so that its future performance is a bit more boring. But we’re at an interesting juncture for interest rates, so it will take time to do so.