Telecom charges up a stodgy sector: utilities
Quick. Name the two utilities featured in the Monopoly board game.
If you guessed Water Works and Electric Company, pass Go and collect $200.
Many players may opt to control the only two utilities in the game, but those holdings just don't carry the oomph of Park Place or Boardwalk.
Utilities are just ho-hum.
But that's not how Eaton Vance Utility Fund manager Judy Saryan sees it. In fact, when it comes to buying and selling utility stocks, Ms. Saryan adds spice by investing heavily in a utility that Parker Brothers forgot: telecommunications.
"When you look at the overall utilities industry, the growth is really coming out of telecom," Ms. Saryan says from her Boston office at Eaton Vance headquarters, "And that's why our fund has done well this year."
Her fund's 40 percent return over the past year puts it among the top five utility funds, according to rankings by Chicago-based fund-tracker Morningstar Inc. It also touts an 18 percent annualized return for the past five years.
And Saryan is confident of the fund's future success. She's "quite pleased" with how it is positioned following the announcement Oct. 5 by long-distance carrier MCI WorldCom Inc. to buy Sprint Corp. for $115 billion - the biggest merger in history.
While she reduced the fund's exposure to MCI Worldcom earlier this year, Sprint remains among its top holdings. Saryan also has big stakes in SBC Communications, Energis, GTE, and Bell Atlantic.
More recently, the fund's portfolio shifted more toward two areas more commonly associated with utility funds. "We're balancing that growth that we're getting in telecom with the stability that you get from the electric and natural-gas areas," she says.
Such a move comes as no surprise to fund analysts. "Telecoms have had a great run for some time, but I think some people are wondering if this going to keep going on or are there more opportunities elsewhere," says Morningstar analyst Justin Craib-Cox.
He adds that Saryan's portfolio falls in line with most utility funds.
As of Sept. 30, the fund held 46.5 percent of its stock in communication services and 41 percent in utilities, according to Morningstar.
Saryan, one of six female portfolio managers at Eaton Vance, now manages some $499 million in the utility fund, which requires a 5.75 percent up-front fee and a $1,000 minimum investment.
Her fascination with stock picking began in the 1960s at her childhood home in Wilmington, Del., where she would often listen to stock reports on the radio with her father. When she heard that her dad's GM stock had risen to about $120 a share, she tried to get him to sell. He didn't, "and that was the peak of that stock," she says.
After graduating with an economics degree from Wellesley College in 1975, Saryan went to work for a consulting company, focusing her energy on AT&T and the telecommunications industry.
That background eventually came in handy as she went on to analyze utility stocks at two other Boston-based investment firms before winding up at Eaton Vance this year.
Besides the fast-merging world of telecom, another element that adds excitement to the utility sector is the move toward energy deregulation across the US.
Some 23 states have passed measures to deregulate utilities and six of those already offer consumers the opportunity to pick their electricity and gas providers.
Before deregulation began to gather steam, most utility-fund portfolios held stocks from stodgy state and local electric, phone, or gas suppliers. In effect, these monopolies brought home the bacon - lots of dividend income for investors - but little promise of growth.
Now, "utilities are not raising their dividends as much as they used to, in fact some have started to reduce dividends," says Saryan. "If you are chasing income, you are going to find yourself in companies that do not perform as well longer term." For those looking for income, she says bonds are "a better bet."
While Saryan doesn't have one approach to picking energy stocks, she says it often comes down to management quality. She also looks for utilities that may be attractive acquisition targets. "I'd much rather be in a company that gets acquired than the acquiring company," she says.
As for deregulation: "What we've seen so far is that in states which have deregulated, the companies tend to outperform as that deregulation comes to fruition," she says.
Top-performing utility funds
Utility funds have mostly been favored by conservative investors seeking income. But this fund category has recently become more growth
oriented and risky due to energy deregulation across the US and the booming telecommunications industry.
3-YR. FUND NAME YTD ANNUALIZED Lindner Utility Inv 33.3% 15.1% 314-727-5305
Fidelity Advisor Utilities Growth A 21.6 31.1 800-522-7297
Eaton Vance Utilities B 19.6 20.0 800-225-6265
Flex-Partners Utility Growth A 16.7 19.2 800-494-3539
Franklin Global Utilities A 16.5 18.2 800-342-5236 Source: Morningstar Inc. (as of 10/20)
(c) Copyright 1999. The Christian Science Publishing Society