Utility sector casts off image of income haven

Managers branch out into tech-related stocks

Mutual funds

April 23, 2000|By Russel Kinnel | Russel Kinnel,MORNINGSTAR.COM

Sector funds have always been a place where you invest to make an aggressive bet on a sector. Utilities funds used to be the exception, however. This was the place where grandparents invested to get a steady stream of income and get some shelter from the market. That was before deregulation and the information technology explosion that transformed sleepy phone companies.

Utilities funds have been scattered across the investment map. Some go for fast-growing telecommunications stocks, while others have stuck with high-yielding electric utilities. One of the former earned a 50 percent return last year, while one of the latter lost 15 percent. The average three-year standard deviation for utilities funds has soared from 9.62 in 1995 to 16.14 today, while the average P/E has grown from 17.75 to 26.04. On top of that, the average utility fund yields a measly 1.6 percent.

Further, electric utilities are now a small part of the overall market. While they have far less price risk than tech stocks, they make up just 2 percent of the S&P 500 compared with 33 percent for tech. That means utilities funds have greater relative performance risk and investors risk having a big chunk of assets tied up in a small niche.

Franklin Utilities lost 15 percent last year. If that can happen in an up market, I'd say the sector is more gamble than hedge (like the rest of the stocks found in utilities funds.) However, as gambles go, it doesn't sound too bad.

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