Personal Finance: Q & A
BOSTON — 'Total Return' - A Key Concept
Own stock in an electric utility? Check whether it will lose in new climate.
Q Mutual fund companies are always talking about "total return." What exactly is total return, and should it be the main reason for buying a fund?
- S.C. Jersey City, N.J.
A Total return is the market performance of a fund over time, such as a month, quarter, or year,. and it includes three factors: (1) dividends or other income payments; (2) capital gains or losses (the profit or loss when the fund manager sells a security); and (3) changes in the share prices of securities that the fund holds.
A high total return should be a major - but not your only - goal in choosing a fund, financial advisers say. For example, you also should know what role the fund plays in your overall plan (Most people want some money in bond or money-market funds, even though stock funds in general offer the highest annual returns.)
And some investors might pick a stock fund that they know is unlikely to top the charts - if it has a record of falling less than average during in market slumps.
One challenge: You can't judge future returns by past performance.
Q I have stock in an electric company that is preparing for the coming competition in the power industry. A letter informing stockholders of plants being sold uses the term "stranded investments." What are these and what is the potential downside for stockholders?
- T.J., Fryeburg, Maine
A "Stranded investments" is industry lingo for plants, approved by regulators in yesterday's monopoly environment, that may no longer be profitable as deregulation occurs, says David Thickens, a utilities expert at Northern Asset Management in Duluth, Minn. Often the cost of these plants burdens company balance sheets with debt.
But now, under deregulation, utilities may have more trouble recovering their costs, and profits or dividends could suffer (see our cover story starting on Page B1).
Mr. Thickens urges utility shareholders to check with their broker or financial adviser.
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