The Big Screen: Getting a Charge out of Utilities Funds

As Silicon Valley programmers write code longhand by candlelight, everyone's saying there could be serious growth in utilities as they scramble to keep a digital economy running. So, today's Big Screen looks at mutual funds that zero in on the sector, and turns up utilities offerings that have done well in times of darkness and times of light, so to speak.

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With the Internet and server farms soaking up more power faster than some utilities can make it, companies like Calpine(CPN Quote) and Duke Energy(DUK Quote) are selling excess power at steep rates to utilities that can't keep up with their customers' demand. This outsize demand, combined with deregulation, should pave the way for heightened competition, consolidation and higher growth for the surviving companies. The bad news is that utilities aren't a sleepy "widows and orphans" sector anymore, but the good news is that you might earn higher -- if more volatile -- returns from utilities funds in the coming years.

These funds held up well in last year's storm, posting a 7.2% gain, on average, vs. the S&P 500's 9.1% loss. Over the long term, they lag behind the S&P, but these figures can be misleading because conservative, income-oriented funds and more aggressive, telecom-heavy funds all fall under the "utilities" banner. If you're interested in a utilities fund that has beaten its peers without a slew of volatility, we've done some snooping for you.

A Tough Decade for Utilities The average utilities fund trailed the broader market in recent years
	Avg. Utilities Fund	S&P 500
YTD Return	-3.9%	-0.1%
1-Year Return	3.5	-6.9
5-Year Return	14.3	18.8
10-Year Return	13.7	18
Source: Morningstar. Annualized performance figures through Jan. 17.

We sifted the category for those funds that beat their average peers over the past one-, three-, and five-year time periods. To screen out funds that took inordinate risks, we singled out above-average performers that lost less than their average peer in down months over the past three years, according to Morningstar. We ended up with seven funds, and here they are, ranked by their five-year annualized returns.

Leading Utilities Funds
Fund	5-Year Annualized	3-Year Annualized	1-Year Return
(MMUFX Quote)MFS Utilities A	21%	18.8%	5.1%
(PRUAX Quote)Prudential Utility A	17.8	13.8	26.6
(AUIAX Quote)Alliance Utility Income A	17.5	16.6	7.3
(EVTMX Quote)Eaton Vance Utilities A	16.3	19.7	0.8
(CUTLX Quote)Liberty Utilities A	16	16.8	13.4
(INUTX Quote)AXP Utilities Income A	15.7	12.8	6.7
(VKUAX Quote)Van Kampen Utility A	15.6	14.7	6.7
Avg. Utilities fund	14	12.2	3.5
S&P 500	18.8	12.7	-6.9
Source: Morningstar. Annualized performance figures through Jan. 17.

Oddly, all the funds on our list are broker-sold -- unless you work with a broker, it's usually a good idea to find a solid fund that doesn't charge a load or sales charge. So, let's look at a couple and then check out a solid no-load fund you might consider, too.

Chart-topping (MMUFX Quote)MFS Utilities might be the cream of the utilities fund crop. Manager Maura Shaughnessy has held the reins since the fund's 1992 inception and has taken a broadly diversified approach, blending dividend-paying stocks with shares of more aggressive telecom firms. The strategy has kept volatility modest, without hurting returns.

The fund's 21% five-year annualized return beats the S&P 500 by more than two percentage points and all of the fund's peers.

Another manager who has posted solid returns without taking exorbitant risks is Bern Fleming, manager of the (INUTX Quote)AXP Utilities Income fund since 1995. Like Shaughnessy, Fleming has blended more aggressive telecom stocks with more staid, income-producing fare within a broadly diversified portfolio. This has held the fund back a bit in years like 1999, when peers loaded up with telecom stocks shone. Even then, though, the fund managed a more than 8% gain.

The fund's 15.7% annualized gain over the past five years beats more than 60% of its peers, and the fund hasn't had a down year with Fleming at the helm.

No-load investors looking for a utilities fund might be drawn to the (FIUIX Quote)Fidelity Utilities fund. After all, the Boston firm is well known for its deep bench of analysts who have cut their portfolio management teeth on its eye-catching sector funds. Unfortunately, this fund is really best for those investors hunting for a telecommunications fund.

Like many utilities funds, Fido's Utilities portfolio holds most of its money in the growthy telecom sector, compared with 33.6% for the average utilities fund. The reason this fund and those of its ilk didn't make our cut is that a big telecom stake generally leads to higher volatility than its peers. Last year, for instance, telecom stocks sagged and this fund lost more than 20%, lagging its average peer by more than 27 percentage points.

A more sensible no-load fund to look at might be the (SAMUX Quote)Strong American Utilities fund, which has been run by a tenured nine-member management team at subadviser W.H. Reaves since its 1993 inception. The team charts a fairly conservative course, looking for stocks it believes are undervalued where the company also has a record of boosting dividends.

That said, the team isn't afraid to make big bets on stocks it likes. At the end of September, for instance, the fund had more than 8% of its assets invested in diversified utility Dominion Resources(D Quote). At that point, the fund also had just 15% of its assets in the telecom sector, less than half its average peer.

The fund narrowly missed our cut because its 14.1% annualized return barely lagged its average peer. Still, its consistent approach and results makes it worth a look for those who invest on their own.

A look at the favorite stocks among the seven funds on our list doesn't provide a shock. There are telecom stocks like SBC Communications(SBC Quote) and Verizon Communications(VZ Quote), as well as power generating shops like Duke Energy and Calpine.

Under the Hood The stocks with the biggest weighting in the combined portfolios of the seven funds listed above
Stock	Weighting in Top- Seven Funds	Number of Top-Seven Funds Owning the Stock
SBC Communications(SBC Quote)	4.3%	7
Duke Energy(DUK Quote)	2.8	7
Dynegy(DYN Quote)	2.5	6
Calpine(CPN Quote)	2.5	4
Coastal(CGP Quote)	2.4	5
Verizon Communications(VZ Quote)	2.2	6
BellSouth(BLS Quote)	2.1	6
Enron(ENE Quote)	2	6
Pinnacle West Cap(PNW Quote)	1.9	7
El Paso Energy(EPG Quote)	1.8	6
Source: Morningstar. Holdings as of funds' most recent portfolio reports.