The Daily Screen: The Best Utilities Funds

 

Utilities funds have given investors some shelter in this stormy year -- but we're talking about the pure types, not the cloaked telecom funds that shined last year.

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A slew of utilities funds gorged themselves at the telecommunications-stock buffet last year, when the average telecom fund shot up more than 70%. But this year the phone funds are down more than 28% and those cheating utilities funds are taking a similar beating. The (LDUTX)Lindner Utility fund, for instance, has nearly half its assets in telecommunications stocks and only 16% of its money in stocks with a utilities label. It rose more than 60% last year and is down 13.1% this year.

Conversely, many of the more diversified utilities funds out there have stayed above water as energy prices have risen and skittish investors have flocked to the traditionally steady sector. This year the average utilities fund is up 4.7%, which sounds pretty tame but is tough to knock since the S&P 500 is in the red.

Power Play
Average Utilities Fund S&P 500
YTD Return 4.7% -5.7%
1-Year Return 7.6 -2.3
5-Year Return* 15.6 20
10-Year Return* 14.3 18.4
Source: Morningstar. *Annualized. Performance through Nov. 20.

While a utilities fund looks like an intriguing and somewhat all-weather addition to your portfolio, it's not a sleepy "widows and orphans," contrary to its sleepy reputation. Deregulation of electricity and other energy businesses has stoked competition and consolidation, morphing the sector into somewhat of a growthy area. And telecommunications, where many companies have dipped a toe into the lucrative but dicey bandwidth business has begun to play a big role in many utilities funds. Consider that the average utilities fund has less than half its money in utilities stocks, according to Morningstar.

But if you're in the market for a utilities fund, we've done some homework for you. We screened the category for funds that beat their average peer over the past one- and three-year periods. Here's a top-10 list, ranked by one-year returns. We've also sifted these leading funds' portfolios to see what stocks they're betting on, but first let's check out the funds.

Leading Utilities Funds
Fund 1-Year Return 3-Year Return*
(IUTLX)Galaxy II Utility Index R 44.4% 20.4%
(GASFX)American Gas Index 38 17.5
(PRUAX)Prudential Utility A 27.3 17
(CUTLX)Liberty Utilities A 20.7 20.1
(VKUAX)Van Kampen Utility A 20.5 19.5
(SAMUX)Strong American Utilities 15.4 16.2
(AUIAX)Alliance Utility Income A 14.7 21.7
(MMUFX)MFS Utilities 14.4 21.1
(INUTX)AXP Utilities Income A 13.5 17.6
(EVUAX)Evergreen Utility A 12.5 19.7
Avg. Utilities fund 7.6 15.6
S&P 500 -2.3 15.4
Source: Morningstar. *Annualized. Performance through Nov. 20.

No matter what type of investor you are, there's probably a fund or two on this list you'd like to check out. At the top, you'll find two index-tracking, no-load funds in (IUTLX)Galaxy II Utility Index and the (GASFX)American Gas Index -- one of the fund industry's best fund names and tickers: GASFX, pronounced "gas effects."

If you work with a broker, you've got broker-sold funds from Prudential, Liberty and Van Kampen to choose from. There's also the (MMUFX)MFS Utilities fund, run by Maura Shaughnessy, whom many consider to be the guru of the group. For more on Shaughnessy's investment approach, check out TheStreet.com's recent 10 Questions interview. All of these broker-sold funds have had lower volatility than their average peer, according to Morningstar, but Shaughnessy's fund has been among the steadiest.

If you're a no-load investor looking for active management with lower relative risk, check out the (VGSUX)Vanguard Utilities Income fund. The fund typically only owns stocks that pay dividends, and while that approach has kept it behind its average peer-and off our list, it might make sense for conservative investors.

A more aggressive no-load option is the (SAMUX)Strong American Utilities fund, where the fund's management team tends to make big bets on its top 10. That can boost risk, but the fund beats its average peer over the past one-, three- and five-year periods, according to Morningstar.

Looking at what's driven these leading funds we find a cumulative top-10 list rightly dominated by utilities stocks like Duke Energy(DUK), El Paso Energy(EPG) and Dynegy(DYN).

But there is a telecom stock -- SBC Communications(SBC) -- and two energy companies that are getting into the bandwidth business to provide businesses and consumers with Net access and data communications -- Enron(ENE) and Williams Companies(WMB).

Something for everyone, just like the utilities fund pack.

Under the Hood
Stocks with the biggest weighting in the combined portfolios of the 10 funds listed above.
Stock Weighting Top-10 Funds Owning the Stock
Enron(ENE:NYSE) 4.2% 9
Duke Energy(DUK:NYSE) 3.5 10
Dynegy(DYN:NYSE) 2.6 8
Coastal(CGP:NYSE) 2.4 8
El Paso Energy(EPG:NYSE) 2.2 9
Williams Companies(WMB:NYSE) 2.2 8
SBC Communications(SBC:NYSE) 2.1 8
Calpine(CPN:NYSE) 2 4
Dominion Resources(D:NYSE) 2 6
Reliant Energy(REI:NYSE) 1.9 7
Source: Morningstar. Holdings as of funds' most recent portfolio reports.

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