NEW YORK (TheStreet) -- Worried about weak job markets and European debt problems, investors have been fleeing risky assets and searching for safe havens. That has been boosting utilities stocks, which have long been viewed as defensive holdings. Even during hard times, companies that produce power tend to record relatively consistent sales. So far this year, utilities funds have returned 7.3%, compared to 4.2% for the S&P 500, according to Morningstar.
Make no mistake, utilities remain stodgy choices that excel in downturns and lag in bull markets. During the collapse of 2008, the average utility fund outdid the S&P 500 by 3 percentage points. But in the rebound of 2009, the funds trailed the benchmark by 8 percentage points.
Still, utilities funds can be sound choices to diversify portfolios and cushion downturns. For conservative investors, a top fund is Franklin Utilities (FKUTX), which has returned 6.5% annually during the past 10 years and outdone 85% of its peers. Franklin limits risk by focusing on the safest electric power producers. In contrast, many competitors hold unregulated telecoms and energy companies, which can present greater risks.
Franklin portfolio manager John Kohli looks for companies with rock-solid balance sheets and the potential to deliver earnings and dividend growth. Once he buys a stock, Kohli holds on for years. Last year the fund only turned over 5% of its portfolio, while the average competitor had a turnover rate of 135%. Following the cautious approach, Franklin has shined in downturns and lagged in bull markets. During 2008, Franklin outdid 94% of its competitors. In 2009, it trailed 64% of its peers. By avoiding big losses, the fund has delivered strong long-term returns.A favorite holding is Sempra Energy (SRE), which produces power in Southern California. The company is building transmission lines to bring power from new solar and wind farms. Sempra recently increased its dividend, and more growth should be on the way. "Over the long term, we expect the dividend to increase at a 4% to 6% annual rate," says Kohli. Another holding is Southern Company (SO), which produces power in Alabama, Florida and Georgia. The stock pays a dividend yield of 4.8%. The dividend should grow as the company builds new power plants and installs environmental equipment on existing facilities. Investors who are willing to take on a moderate amount of risk can consider Wells Fargo Advantage Utility & Telecom (EVUAX), which has returned 4.9% annually during the past 10 years, outdoing 63% of competitors. Veteran portfolio manager Timothy O'Brien has freedom to range widely, buying unregulated utilities and foreign stocks. To make his picks, O'Brien keeps a close eye on the market cycle.
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