Sizzling utility equity funds grabbing investors' attention

PERSONAL FINANCE

April 25, 1993|By WERNER RENBERG | WERNER RENBERG,1993 By Werner Renberg

Does an above-average dividend rate, below-average volatility and average-or-better long-term total return sound like a winning combination to you? Then consider investing in a well-managed utility equity fund.

In the 12 months that ended March 31, funds concentrated in the stocks of electric, natural gas, and telephone utilities achieved an average total return of 22.8 percent, according to Lipper Analytical Services. That was well above the 15.2 percent return of the stock market as a whole, as measured by the Standard & Poor's 500 Index.

In 1993, through April 15, the group had an average return of 9.6 percent -- more than double the S&P's.

Lipper calculated that the group paid dividends during the last 12 months at an average rate of 4.3 percent, compared to the S&P's yield of 2.8 percent. That helped to modulate the funds' volatility, which is about two-thirds that of the index.

Such data haven't gone unnoticed by investors seeking (1) stable equity investments amid a high-priced stock market and (2) higher yields. Nor have they been overlooked by brokers and other sales people seeking funds they can recommend and sell more easily in this market environment.

Combined, these factors have had an impressive impact.

The group's total assets grew more than 56 percent, to $17.4 billion, in 1992, according to Lipper. All but 9 percent, attributable to total return, came from share sales. Over half the gain in assets came from the four largest funds -- all load funds -- of which the biggest is the $3.6 billion Prudential Utility Fund.

Considering the rush to these funds, you may wonder whether you've "missed the boat."

If you could talk with portfolio managers of the group's leading funds, you'd get the impression that the recent sizzling pace is unlikely to be sustained for the rest of 1993.

But they also would tell you that they expect their funds to offer satisfactory returns and dividends over time.

Before investing, you should understand why these funds have recently achieved returns that exceed their quite respectable long-term results. (Of course, you also need to remember that these are equity funds whose share prices fluctuate. Utility funds are not as stable as money market funds and not as well diversified as growth or other general equity funds.)

A few reasons for the group's recent performance:

* Utility stocks, which tend to be sensitive to changes in interest rates, have benefited from drops in rates.

* Electric companies that have digested costly expansion programs or overcome problems have experienced improvement in earnings.

* Utilities with interests in natural gas reserves have benefited from higher gas prices.

* Telephone companies that have diversified into non-regulated businesses have boosted overall profitability.

In screening funds to find one that appeals to you, be aware of the differences in their investment objectives. Some are concentrated in electric utilities; others invest in a broader range of utilities. Some aim at generating high current income; others emphasize appreciation and may accept moderate income while anticipating dividend increases.

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