Utility Funds Wire Into Phone Firms
| NEW YORK
Talk about electricity: If you want real zip in your investing life, buy into a utility fund.
Until a couple of years ago, the prospect of high-voltage returns from utility funds would have been unthinkable.
Utility companies played the role of tortoise in the stock market race - slow but steady. They always made it to the finish line, without a lot of hopping around.
These electricity and natural-gas companies were heavily regulated by state and federal officials. Their profits were small but virtually guaranteed.
But that has changed. Many utility-fund managers have put some bounce into their holdings by picking up telecommunications stocks.
These are companies whose business ranges from local telephone service to long distance to wireless.
Owning them provides utility funds with some of the aggressiveness found in technology and international investing, and gives them a toehold on the leading edge of market trends.
Telecommunications companies fit the "utility definition," since they are regulated by government for both the rates they charge and the types of business they may pursue.
But they fall well outside the conservative tone of traditional utility companies. They invest and sell cutting-edge technology and they do business around the globe.
The payoff is in the year-to-date returns.
Eighty-five utility funds tracked by information-firm Morningstar, in Chicago, returned an average 4.4 percent, through Aug. 5. That's below the 11.4 percent return of the Standard & Poor's 500 index, but well ahead of many common-stock funds and far, far ahead of smaller growth stocks.
"There's been a sea change in terms of what a 'utility fund' now means. About half of the funds are now telecommunications, growth-oriented, funds," says Amy Granzin, who tracks utility funds for Morningstar. "Many fund companies now offer two distinct types of funds, the older, more conservative electric/natural gas funds, and the newer, more aggressive telecommunications funds."
But even traditional funds are being spiced up with telecom stocks and overseas issues.
"If you are buying into a fund, you'll need to check out its portfolio to see what kinds of companies are listed. You can't just go by the name of the fund," says Ms. Granzin.
Among examples of the more traditional funds:
* Morgan Stanley Dean Witter Utilities B Fund (800-869-6397): Over 50 percent of the portfolio is in electricity/gas companies (through late May), according to Morningstar. The fund is up about 5 percent so far this year.
* Franklin Utilities 1 Fund (800-342-5236): Some 90 percent of its portfolio is in electric companies. It is down about 3 percent, year-to-date.
Among the new breed of utility funds, Fidelity (800-544-8888) offers two types:
* Fidelity Utilities Fund, up about 8 percent this year, has about 35 percent of its portfolio in electric and gas companies. But over 40 percent is in phone companies and phone services. About 10 percent of the portfolio is invested in overseas firms.
* Fidelity Select Utilities Growth Fund, a newer fund, has a smaller amount invested abroad (about 1 percent), but has more than 50 percent of its portfolio in phone-related issues. Only about 20 percent of the portfolio is in electricity/gas distribution. The fund is up 11 percent.
Shopping for performance
According to Morningstar, the top-three-performing utility funds over the past five years (through May) are:
MFS Utilities A (800-637-2929), up 20 percent; Franklin Global Utilities 1, up 18 percent; Fidelity Utilities, up 16 percent.
Shopping for a utility fund? Experts say check out the prospectus, which discloses the kinds of companies included.
It will also detail the fund's global exposure. What companies are held from abroad? Are they stocks of big companies, those with some type of government backing or linkage, or are they smaller, growth-oriented firms with a stronger streak of investment risk?
You should also ask the fund about any recent changes in fund managers.
That's important, since a new management team may totally shift the investment style.
Finally, how do research firms such as Morningstar and Value Line assess the fund's "risk" rating? If you are an aggressive, growth-oriented investor, risk may be a welcome trade-off for higher returns. But more traditional utility investors may want funds with minimal risk.