Survivor: These Funds Resist the Recession

Some fund companies agreed with the criticism. Convinced that the sector was too narrow, Vanguard Utilities Income(VGSUX Quote) changed its mandate to include a range of dividend-paying blue chips. The fund was renamed Vanguard Dividend Growth(VDIGX Quote). In the next few years, several other companies, including Morgan Stanley(MS Quote) and Eaton Vance(EV Quote), also broadened the portfolios of their utilities funds.

The shifts away from utilities came just as the sector was moving into high gear, churning out double-digit returns for five straight years. Instead of owning one of the newly broadened funds, most investors would have gotten higher returns with a pure utilities choice. For example, Vanguard Dividend Growth returned 0.4% annually during the past five years, a strong showing despite the market crash, but nearly 6 percentage points behind the average utilities fund.

Funds that continued to focus on utilities enjoyed a revival because of a variety of factors. First, some of the funds moved away from high-flying stocks and returned to steady performers with reliable earnings. That proved to be a winning move. After being battered in the downturn of the early part of the decade, regulated utilities rebounded nicely as the markets favored solid businesses. The rich dividends of more than 4% appealed to investors who sought income at a time when bond yields were skimpy. In addition, rising energy prices benefited many portfolios, including funds that held unregulated gas companies.

Investors seeking a stable choice now should consider Franklin Utilities(FKUTX Quote). Portfolio manager John Kohli holds mostly rock-solid regulated electric companies. Because regulators permit power producers to raise prices when necessary, the utilities should maintain healthy profit margins during the recession. A big holding is FPL Group(FPL Quote), a Florida electric producer with a secure dividend.