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Utilities funds get sexy
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November 8, 1999: 11:16 a.m. ET
Once a staid investment, returns of these sector funds are soaring
By Staff Writer Martine Costello
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NEW YORK (CNNfn) - Manager Doris Kelley-Watkins likes to joke that the typical investor of a utilities fund used to be a little old man in tennis shoes.
But Kelley-Watkins, manager of the Evergreen Utilities Fund, said the typical investor has changed, just as the typical utility has changed.
"Nobody knows what these industries will look like when they grow up," said Kelley-Watkins, manager of the $174 million Evergreen Utilities Fund. "Everything has changed."
The Evergreen Fund is up 21.65 percent year to date as of Thursday, making it the 11th best performer in a category of 84 funds, according to fund tracker Morningstar. The funds are up as much as 41.30 percent in that time -- and none are losing money, Morningstar said.
What's happened? In the old days, utility stocks were a staid investment alternative for people who wanted regular income from a dividend and didn't mind missing out on stellar growth. An investment in a gas or electric utility, or a phone company, had much less risk on Wall Street.
Then widespread deregulation changed everything. All of a sudden, your grandfather's utility faced intense competition that triggered mergers and spin-offs and required a whole new business approach.
Telecom stocks changed fastest, thanks to more rapid privatization, technology advances and rapid stock growth, said Ian Link, portfolio manager of the Franklin Global Utilities Fund.
"There has been an evolution," Link said. The global utilities index, which is weighted by market capitalization, is now 75 percent telecom stocks. Five years ago, it was 50 percent telecoms and 50 percent utilities.
That's why the Franklin Global Utilities Fund is changing its name to the Franklin Global Communications Fund as of Nov. 15, Link said. The new fund will invest 90 percent of its holdings in telecommunications.
"We thought it was time to evolve the fund and keep up with the trend," Link said.
The Franklin fund, class A shares, have $200 million in assets and is up 23.5 percent as of Oct. 31, Morningstar said.
Some winning stocks
Link's favorite telecoms include Britain's Vodafone AirTouch PLC (VOD), which trades as an American Depositary Receipt, as well as VoiceStream Wireless Corp. (VSTR) and MCI Worldcom (WCOM).
"The way to invest in this industry is to own the industry leaders," Link said. "I believe the rich get richer in this game."
Telecoms are also a big reason for the top returns at the Evergreen fund, representing 31 percent of the portfolio, Kelley-Watkins said.
Among the top holdings in the Evergreen fund has been convertible preferred stock of Nextel Communications (NXTL), up nearly 300 percent since she bought it in March. (Convertible preferred shares pay dividends and can be converted to common stock). Another winner has been convertible preferred stock in Sprint PCS Group (PCS), and the regular stock in Sprint FON Group (FON).
"If the industry is changing, and the investor is changing, then that means the manager has to change, too," Kelley-Watkins said.
Too focused?
Not surprisingly, the utilities funds that have done the best have a big stake in telecommunications stocks, said Justin Craib-Cox, an analyst at Morningstar.
"But you want to be careful of idea-hopping," Craib-Cox said. The more focused the fund, the riskier it gets, he said.
Some utilities funds have found success in other parts of the sector besides telecommunications, Craib-Cox said.
For example, Craib-Cox said the Fidelity Select Utilities Growth Fund, managed until recently by Jonathan Zang, edged back on telecoms and added to electric utilities such as AES Corp. (AES) and Calpine Corp. (CPN). The fund earned 43.1 percent in 1998 and is up 20.3 percent year to date through Oct. 31, Morningstar said.
Among Craib-Cox's favorite utilities funds are AXP Utilities Income Fund, where veteran manager Bern Fleming has delivered solid returns without taking huge stakes in skyrocketing telecoms.
"Fleming invests more or less by staying out of trouble, and staying out of trouble means returns are lower," Craib-Cox said. The fund is up 5 percent year to date through Oct. 31 and earned 22.7 percent last year.
Morningstar recommends against investing in the Franklin Global Utilities Fund "until the dust settles" with the name change. But Morningstar also points out that the fund has a five-year annualized return of 19.06 percent, which is better than its peers.
Link argued that Franklin still has an alternative for utilities purists, the Franklin Utilities Fund, that invests almost exclusively in electric companies.
While some investors have moved into the Franklin Utilities Fund since the change was announced, Link said far more new assets have migrated to the Franklin Global Utilities Fund because of its upcoming change.
Link said he'll continue to hold a small number electric stocks that have a special edge in the Franklin Global Communications Fund. For example, he'll hang onto Montana Power Company (MPT), an operator of electric and gas utilities in Montana. The company owns Touch America, which has a large fiber-optic network.
About 40 percent of the Global Utilities Fund has been invested in international stocks to capitalize on countries that are just beginning to enter the high-tech telephone age.
Despite the risk of a more focused utilities fund, Link said it is still much less volatile than a technology fund.
And a telecom is still a utility at heart, Link said. After all, he asked rhetorically, how many people think phone service is as essential as electricity or gas heat?
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