SEC Form N-CSRS filed by Allspring Utilities and High Income Fund

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-CSRS

CERTIFIED SHAREHOLDER REPORT OF REGISTERED

MANAGEMENT INVESTMENT COMPANIES

Investment Company Act file number: 811-21507

Allspring Utilities and High Income Fund

(Exact name of registrant as specified in charter)

1415 Vantage Park Drive, 3rd Floor, Charlotte, NC 28203

(Address of principal executive offices) (Zip code)

Matthew Prasse

Allspring Funds Management, LLC

1415 Vantage Park Drive, 3rd Floor, Charlotte, NC 28203

(Name and address of agent for service)

Registrant’s telephone number, including area code: 800-222-8222

Date of fiscal year end: August 31

Date of reporting period: February 29, 2024

ITEM 1. REPORT TO STOCKHOLDERS

 

Allspring Utilities and High Income Fund (ERH)

Semi-Annual Report

February 29, 2024

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Letter to shareholders (unaudited)

 

Andrew Owen

President
Allspring Funds

Dear Shareholder:

We are pleased to offer you this semi-annual report for the Allspring Utilities and High Income Fund for the six-month period that ended February 29, 2024. Globally, stocks and bonds generally had positive returns for the period. However, markets were volatile as investors focused on persistently high inflation and the impact of aggressive central bank rate hikes. Riskier assets rallied as investors anticipated an end to the tight monetary policy.

For the period, U.S. stocks, based on the S&P 500 Index,1 returned 13.93%. International stocks, as measured by the MSCI ACWI ex USA Index (Net),2 gained 7.90% while the MSCI EM Index (Net) (USD),3 returned 4.93%. Among bond indexes, the Bloomberg U.S. Aggregate Bond Index4 returned 2.35%, the Bloomberg Global Aggregate ex-USD Index (unhedged)5 gained 1.96%, the Bloomberg Municipal Bond Index6 returned 4.33%, and the ICE BofA U.S. High Yield Index7 gained 6.15%.

Investors remained focused on central bank monetary policies.

As the six-month period began, stocks and bonds both had negative overall returns in September as investors were disappointed by the Federal Reserve’s (Fed’s) determination not to lower interest rates until it has confidence that it has tamed persistently high inflation. As of September, the two primary gauges of U.S. inflation—the annual Core Personal Consumption Expenditures Price Index8 and the Consumer Price Index (CPI)9—both stood at roughly 4%, twice as high as the Fed’s oft-stated 2% target. The month ended with the prospect of yet another U.S. government shutdown, averted at least temporarily but looming later in the year.

October was a tough month for financial markets overall. Key global and domestic indexes all were pushed down by rising geopolitical tensions—particularly the Israel-Hamas conflict—and concerns over the Fed’s “higher for longer” monetary policy. The U.S. 10-year Treasury yield rose above 5% for the first time since 2007. Commodity prices did well as oil prices rallied in response to the prospect of oil supply disruptions from the Middle East. U.S. annualized third quarter gross domestic product (GDP) was estimated at a healthier-than-anticipated 4.9%. China’s GDP indicated surprisingly strong industrial production and retail sales, offset by ongoing weakness in its real estate sector.

1

The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market-value-weighted index with each stock’s weight in the index proportionate to its market value. You cannot invest directly in an index.

2

The Morgan Stanley Capital International (MSCI) All Country World Index (ACWI) ex USA Index (Net) is a free-float-adjusted market-capitalization-weighted index that is designed to measure the equity market performance of developed and emerging markets, excluding the U.S. Source:  MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indexes or any securities or financial products. This report is not approved, reviewed, or produced by MSCI. You cannot invest directly in an index.

3

The MSCI Emerging Markets (EM) Index (Net) (USD) is a free-float-adjusted market-capitalization-weighted index that is designed to measure the equity market performance of emerging markets. You cannot invest directly in an index.

4

The Bloomberg U.S. Aggregate Bond Index is a broad-based benchmark that measures the investment-grade, U.S.-dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, mortgage-backed securities (agency fixed-rate and hybrid adjustable-rate mortgage pass-throughs), asset-backed securities, and commercial mortgage-backed securities. You cannot invest directly in an index.

5

The Bloomberg Global Aggregate ex-USD Index (unhedged) is an unmanaged index that provides a broad-based measure of the global investment-grade fixed-income markets excluding the U.S.-dollar-denominated debt market. You cannot invest directly in an index.

6

The Bloomberg Municipal Bond Index is an unmanaged index composed of long-term tax-exempt bonds with a minimum credit rating of Baa. You cannot invest directly in an index.

7

The ICE BofA U.S. High Yield Index is a market-capitalization-weighted index of domestic and Yankee high yield bonds. The index tracks the performance of high yield securities traded in the U.S. bond market. Returns shown are net of transaction costs beginning on July 1, 2022. You cannot invest directly in an index. Copyright 2024. ICE Data Indices, LLC. All rights reserved.

8

The Core Personal Consumption Expenditures Price Index (PCE) is a measure of prices that people living in the United States, or those buying on their behalf, pay for goods and services. It is sometimes called the core PCE price index, because two categories that can have price swings – food and energy – are left out to make underlying inflation easier to see. You cannot invest directly in an index.

9

The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. You cannot invest directly in an index.

2 | Allspring Utilities and High Income Fund

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Letter to shareholders (unaudited)

“ In November, the market mood brightened as cooling inflation inspired confidence that central banks could hold off on further rate hikes. ”

In November, the market mood brightened as cooling inflation inspired confidence that central banks could hold off on further rate hikes. Overall annual inflation in the U.S. fell to 3.1% in November while 12-month inflation in the U.K. and eurozone eased to 4.6% and 2.4%, respectively—far below their peak levels of mid-2022. Third quarter annualized U.S. GDP growth was raised to an estimated 5.2% while U.S. job totals rose by just below 200,000 in November, indicating a slight cooling of the labor market. All of this fresh evidence added to confidence for a U.S. soft economic landing, leading to a more buoyant mood heading into winter as the Federal Open Market Committee held rates steady at its December meeting.

The broad year-end rally among stocks and bonds that began in November continued through December as investors became more confident that monetary policy would ease in 2024. Supporting the bubbly market mood were a series of reports confirming lower inflationary trends in the U.S. and Europe. During the period, it appeared more likely that the U.S. economy could achieve a soft landing, cooling enough to lower inflation without the pain of a recession. However, by year-end, an expectations gap developed. Capital markets priced in a total of 1.50 percentage points in federal funds rate cuts in 2024, twice as much as the three cuts of 0.25% hinted at by Fed officials.

Financial market performance was mixed in January 2024 as U.S. stocks had modest gains while non-U.S. equities, particularly those in emerging markets, and fixed income assets were held back by central banker pushback on market optimism over rate cuts. Overall, optimism was supported by indications of a soft landing for the U.S. economy. Key data included a surprisingly strong gain of 353,000 jobs in January, an unemployment rate of just 3.7%, and a rise of just 3.1% in the CPI in January. However, that resilience helped push back expectations of a rate cut in March to a more likely second quarter initial move.

In February, stocks were supported by positive economic data and strong corporate earnings. However, fixed income investments were under pressure as resilient inflation led to lowered expectations on the timing of interest rate cuts. The S&P 500 Index had solid monthly gains along with emerging market equities, which benefited from a rebound in China.

Don’t let short-term uncertainty derail long-term investment goals.

Periods of investment uncertainty can present challenges, but experience has taught us that maintaining long-term investment goals can be an effective way to plan for the future. Although diversification cannot guarantee an investment profit or prevent losses, we believe it can be an effective way to manage investment risk and potentially smooth out overall portfolio performance. We encourage investors to know their investments and to understand that appropriate levels of risk-taking may unlock opportunities.

Thank you for choosing to invest with Allspring Funds. We appreciate your confidence in us and remain committed to helping you meet your financial needs.

Sincerely,

 

Andrew Owen
President
Allspring Funds

For further information about your fund, contact your investment professional, visit our website at allspringglobal.com, or call us directly at 1-800-222-8222.

Allspring Utilities and High Income Fund | 3

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Performance highlights (unaudited)

 

Growth of $10,000 investment as of February 29, 20241

  

1

The chart compares the performance of the Fund for the most recent ten years with the Russell 3000® Index, ERH Blended Index, S&P 500 Utilities Index and ICE BofA U.S. High Yield Constrained Index. The chart assumes a hypothetical investment of $10,000 investment and reflects all operating expenses of the Fund.

 

Comparison of NAV vs. market value1

  

1	This chart does not reflect any brokerage commissions charged on the purchase and sale of the Fund’s common stock. Dividends and distributions paid by the Fund are included in the Fund’s average annual total returns but have the effect of reducing the Fund’s NAV.

 

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Performance highlights (unaudited)

MANAGER’S DISCUSSION

Overview

The Fund’s return based on market value was -1.95% for the six-month period that ended February 29, 2024. During the same period, the Fund’s return based on net asset value (NAV) was 1.68%. Based on its market value and NAV return, the Fund underperformed the ERH Blended Index, which returned 2.20%.

The equity sleeve trailed its benchmark as investors favored more volatile stocks over utilities.

The Fund’s equity sleeve trailed its benchmark, the S&P 500 Utilities Index, by less than 0.5% for the period.

After a tough first three quarters of 2023, utilities stocks finally showed signs of life late in the year as the Federal Reserve (Fed) telegraphed an end to interest rate hikes, and the market’s advance broadened beyond information technology. Utilities stocks often underperform on a relative basis when dividend yields compare less favorably with higher rates on alternative investments or when investors favor riskier stocks. Additionally, investors have expressed concerns over utilities’ need to raise significant amounts of capital, at higher interest rates, to fund investments in their systems. Through the first two months of 2024, utilities underperformed the market by more than 9% as riskier stocks resumed market leadership.

The equity sleeve managers sold its position in Evergy, an electric utility that lowered its projected growth rate following a disappointing outcome in a request for a rate  increase. Additionally, they pared the position in NextEra, a regulated utility that is also a leading developer of unregulated renewable energy projects. This utility dealt with several challenges, including concerns around its ongoing ability to finance rapid growth in its renewables portfolio. The managers added to several utilities in states with what they believe are attractive regulatory environments.

 

Ten largest holdings (%) as of February 29, 20241
NextEra Energy, Inc.	10.52
Sempra Energy	5.48
American Electric Power Co., Inc.	5.36
Southern Co.	5.19
Constellation Energy Corp.	5.19
Duke Energy Corp.	5.14
DTE Energy Co.	4.17
Exelon Corp.	3.96
CMS Energy Corp.	3.59
CenterPoint Energy, Inc.	3.51

 

1	Figures represent the percentage of the Fund’s net assets. Holdings are subject to change and may have changed since the date specified.

Detractors included not owning a large power producer.

The largest detractor from relative performance was NRG Energy, an independent power producer in the benchmark. While the stock outperformed in the six-month period, the managers do not view this company’s business model favorably, as it has strayed from traditional

utility functions such as power generation and distribution. 

Sector allocation as of February 29, 20241

  

1	Figures represent the percentage of the Fund’s long-term investments. Allocations are subject to change and may have changed since the date specified.

Not owning a renewable power generator aided relative results.

The Fund benefited from not owning AES Corp., a benchmark stock that focuses on renewable power generation, a sub-sector that has been out of favor. It also benefited from an overweight position in Constellation Energy, a company predominantly involved in nuclear power generation, an area that has attracted interest related to the buildout of data centers tied to artificial intelligence.

Equity sleeve outlook:  Utilities provide solid total return potential and below average volatility.

The equity sleeve managers continue to see a clear path for moderate yet consistent growth in utility earnings and dividends. This, combined with estimated dividend yields for the sector that exceed the broader market, could continue to provide investors with solid total return potential and below-average volatility. Valuation supports this belief. After their worst relative performance in 40-plus years in 2023 and an inauspicious start to 2024, utilities recently traded at a roughly 27% discount to the broader market in contrast to the 15-year average of a slight premium. Challenges to the sector include inflation, interest rates that exceed expectations, or higher risk appetites by equity investors, which could lead to utility

underperformance. 

 

Allspring Utilities and High Income Fund | 9

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Performance highlights (unaudited)

Credit quality as of February 29, 20241

  

1

The credit quality distribution of portfolio holdings reflected in the chart is based on ratings from Standard & Poor’s, Moody’s Investors Service, and/or Fitch Ratings Ltd. Credit quality ratings apply to the underlying holdings of the Fund and not to the Fund itself. The percentages of the portfolio with the ratings depicted in the chart are calculated based on the market value of fixed income securities held by the Fund. If a security was rated by all three rating agencies, the middle rating was utilized. If rated by two of the three rating agencies, the lower rating was utilized, and if rated by one of the rating agencies, that rating was utilized. Standard & Poor’s rates the creditworthiness of bonds, ranging from AAA (highest) to D (lowest). Ratings from A to CCC may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the rating categories. Standard & Poor’s rates the creditworthiness of short-term notes from SP-1 (highest) to SP-3 (lowest). Moody’s rates the creditworthiness of bonds, ranging from Aaa (highest) to C (lowest). Ratings Aa to B may be modified by the addition of a number 1 (highest) to 3 (lowest) to show relative standing within the ratings categories. Moody’s rates the creditworthiness of short-term U.S. tax-exempt municipal securities from MIG 1/VMIG 1 (highest) to SG (lowest). Fitch rates the creditworthiness of bonds, ranging from AAA (highest) to D (lowest). Credit quality distribution is subject to change and may have changed since the date specified.

Bond market performance tied closely to Fed expectations.

The Fund’s high income sleeve underperformed its benchmark for the period.

In response to Fed Chairman Jerome Powell’s dovish pivot at the December Federal Open Market Committee (FOMC) meeting, the bond market priced in three more rate cuts than the FOMC’s median 2024 estimate. This resulted in an “everything rally” to finish 2023 that left corporate credit spreads near the tightest levels since the Global Financial Crisis.

At the start of 2024, various economic signals suggested inflation risks continue to be elevated. Thus, Fed-speak turned hawkish, emphasized patience, and suggested more work is required to ensure inflation sustainably returns to target. In response, the rates market quickly repriced expectations for monetary policy toward Fed expectations. Despite the repricing of rate cuts and historically elevated corporate supply, credit valuations remain rich.

The high-income sleeve was aided by cable and satellite but hurt by electric utilities.

The main contributors to the performance of the high-income sleeve came from an underweight allocation to and security selection within the cable/satellite and packaging sectors, while electric utilities and media

and entertainment were our worst-performing sectors as a result of security selection.

The high-income allocation shifted to higher-quality issuers.

During the trailing six months, we increased our BB- and above-rated bond exposure while decreasing our allocation to single-B-rated bonds. At the end of the period, the high-income sleeve was most overweight gas distribution and electric generation and most underweight telecommunications—wirelines and chemicals. Overall, the high-income sleeve remained short duration relative to the index and continued to

slightly out-yield the index. 

Geographic allocation as of February 29, 20241

  

1	Figures represent the percentage of the Fund’s long-term investments. Allocations are subject to change and may have changed since the date specified.

High-income outlook:  Economic fundamentals are improving.

Looking ahead at our six-month outlook, economic fundamentals appear to be improving as cyclical industries such as the manufacturing and housing sectors have shown signs of early-stage recoveries. U.S. consumers remain in solid shape with low, but slowly weakening, debt coverage ratios. Consumer spending is likely to moderate off the levels seen in the second half of 2023 but remain resilient due to positive wealth effects and strong wage gains.

Despite growth likely to trend near historical average levels, inflation is expected to continue inching toward the Fed’s target. We believe that lower inflation and a slowly loosening labor market could enable the Fed to be able to deliver upon its December rate cut projections, which should be supportive of high yield spreads. However, the risk of the disinflation progress stalling out could lead to further rate and spread volatility.

Leverage impact was negative.

The Fund’s use of leverage through bank borrowings had a negative impact on total return performance during this reporting period as it reduced gains. As of February 29, 2024, the Fund had approximately 24% of total assets in leverage.

Fund distributions

Pursuant to an exemptive order issued by the Securities and Exchange Commission (the “Order”), the Fund is authorized to distribute long-term capital gains to shareholders more frequently than once per year. Pursuant to the Order, the Fund’s Board of Trustees approved a managed distribution plan pursuant to which the Fund makes monthly cash distributions to common shareholders. The Fund’s managed distribution plan had no effect on the Fund’s investment strategy during the six-months ended February 29, 2024 and is not expected to have such an

 

10 | Allspring Utilities and High Income Fund

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