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Falling Oil Boosts Utilities Funds

Last month, TheStreet.com Ratings required me to actually use my vacation time, so I spent a week skiing Dercum Mountain in Keystone, Colo.

At 11,600 feet of elevation, we had fresh powdery snow nearly every night to cushion my frequent falls. By midmorning each day, the white-out conditions would pass, revealing spectacular views.

The trip gave me an appreciation of the business model of Vail Resorts (MTN), which owns Keystone.

With what appeared to be near monopoly conditions within the resort, favorable pricing power is maintained. The company's four-year stock chart resembles the gondola ride up one of its company-run mountains.

Luckily, I escaped Denver just before the first of two major blizzards buried Colorado and some of the surrounding states.

While Colorado ski resorts rejoice, the ski resorts in the Northeast United States and Europe's Swiss Alps are suffering under unseasonably warm weather with little to no snow.

The weather has been so mild that heating oil inventories have begun to build up to levels that have spooked oil traders.

At the same time, the U.S. dollar has bounced higher on the belief that recent strength in economic statistics may allow the Federal Reserve to raise interest rates.

Putting all these factors together sent the price of oil sliding. Last summer, crude oil prices topped $77 a barrel, but they have fallen to the $55 level.

If the price of oil drops further, don't be surprised if OPEC advances the date of its next meeting in order to discuss cutting oil supplies.

But in the meantime, what hurts energy-producing companies helps energy-consuming utilities.

Oil Slide
Warm weather puts dent in crude prices
Source: Bloomberg





Over the last year, the utility funds we rate have gained an average of 23.56%, although they've given back 0.25% in the week ended Thursday Jan. 4 (which includes just three trading days). The strong performance of the past 12 months helps explain why utility funds are TheStreet.com Ratings' top-ranked sector for both open-end and closed-end funds.

Top-Performing Utility Sector Funds
Based on total return for the three trading days ended Jan. 4
Fund Ticker Rating Fund Type 1 Week Total Return
Gartmore Global Utilities C GGUCX B Open-End 0.84%
ICON Telecommunications & Utilities ICTUX C+ Open-End 0.64%
Cohen&Steers Select Utility Fund UTF A Closed-End 0.53%
Franklin Utilities R FRURX A+ Open-End 0.22%
Fidelity Select Utilities Growth FSUTX A+ Open-End 0.14%
Evergreen Utilities&High Income ERH B+ Closed-End 0.14%
Gabelli Utilities B GAUBX B Open-End 0.11%
Utilities Select Sector SPDR XLU B+ ETF 0.11%
Gabelli Global Utility&Income Trust GLU A+ Closed-End 0.09%
Fidelity Adv Utilities A FUGAX A+ Open-End 0.05%
Source: Bloomberg

The best of the top-performing list this week is the (GGUCX) Gartmore Global Utilities , which returned 0.84% from Dec. 28, 2006 to Jan. 4, 2007. The fund had an outsized total return of 35.76% in 2006. The bulk of the fund's holdings (as of the latest publicly available data), or 52.7%, are in telecommunications companies such as Vodafone (VOD), Verizon (VZ) and BellSouth (BLS), which this week was acquired by another Gartmore position, AT&T (T). Electric utilities are the second-largest group of holdings, at 39.5%, including Scottish Power (SPI) and International Power (IPR).

Next on the list is the (ICTUX) ICON Telecommunications & Utilities fund, which has 63.6% in telecommunications, 20.9% in electric utilities and 5.4% in water stocks. Verizon, BellSouth and AT&T are the fund's largest three holdings.

Also high on the list of top performers for the week is the (UTF) Cohen & Steers Select Utilities Fund . This closed-end fund is more of a pure play on electricity generation, which represents 73.4% of assets. Its top holdings include Duke Energy (DUK), Exelon (EXC), TXU (TXU), Southern Co (SO), PG&E (PCG) and the company that keeps my lights on most of the time, FPL Group (FPL). Real estate investment trusts account for 8.1% of the fund's portfolio and telecommunications just 3.5%.

With a 91.3% of assets in electric and 7.2% in gas companies, the Utilities Select Sector SPDR (XLU) has many of the same top holdings as Cohen & Steers Select Utilities, along with big stakes in Dominion Resources (D), Entergy (ETR) and FirstEnergy (FE).

Of the 88 utility funds we track, an amazing 70 are in the range of A- or better because they have outperformed other categories of mutual funds for so long. The following is evidently the best-rated list of worst performers in the history of TheStreet.com Ratings.

Worst-Performing Utility Sector Funds
Based on total return for the three trading days ended Jan. 4
Fund Ticker Rating Fund Type 1 Week Total Return
MFS Utilities Fund R2 MMUKX A- Open-End -1.17%
J Hancock Trust Utilities Ser I JEUTX A- Open-End -1.16%
JennDry Jennison Utility B PRUTX A+ Open-End -1.06%
Flex-funds Total Return Utilities FLRUX A+ Open-End -1.03%
AIM Utilities Fund A IAUTX A+ Open-End -0.77%
Eaton Vance Utilities A EVTMX A+ Open-End -0.60%
AllianceBern Utility Income B AUIBX A+ Open-End -0.51%
PowerShares Dynamic Utilities PUI A+ Closed-End -0.37%
Putnam Utilities Gr & Inc B PUTBX A+ Open-End -0.30%
BlackRock Utilities/Telecom C1 MCGUX A+ Open-End -0.28%
Source: Bloomberg

After returning 30.83% in 2006, the (MMUKX) MFS Utilities Fund got 2007 off to a slow start. The fund is made up of 53.7% electric, 20.1% telecommunications, 6.5% media and 4.4% oil and gas, with large holdings of NRG Energy (NRG), Edison International (EIX) and the Williams Cos (WMB).

AT&T's $83.1 billion purchase of BellSouth this week reshapes the competitive landscape of the telecommunications portion of the utility sector. Speculation on additional telecom mergers may continue to support the prices of these companies in the near-term.

As for the weather and the price of oil, if the temperatures do dip later this month or early next month, the price of oil may bounce back. To the extent that electric utilities can hedge or pass through this cost to their customers, the companies and the funds that hold them are well-positioned for another good year.

Kevin Baker became the senior financial analyst for TSC Ratings upon the August 2006 acquisition of Weiss Ratings by TheStreet.com, covering mutual funds. He joined the Weiss Group in 1997 as a banking and brokerage analyst. In 1999, he created the Weiss Group's first ratings to gauge the level of risk in U.S. equities. Baker received a B.S. degree in management from Rensselaer Polytechnic Institute and an M.B.A. with a finance specialization from Nova Southeastern University.

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