The collapse of Enron Corp shares and declining oil prices may push money managers who run mutual funds focused on utilities back to basics.
Utility funds, a perennial haven in previous bear markets, burned investors this time around, hurt by holdings in telecommunications shares and California power businesses. Now companies that generate steady earnings and provide higher-than-average dividends are likely to draw fund managers' cash.
"This may have been the turning point, where the industry went back to its roots and refocused on quality of earnings, cash flow and not growth for the sake of growth," said Judith Saryan, who manages the US$430 million Eaton Vance Utilities Fund. "It's not by definition a growth industry."
Certainly not this year.
The 67 utility funds tracked by Bloomberg lost an average 20 percent this year, compared with 16 percent loss of for the average stock fund tracked by Bloomberg. The group's best performer, the Liberty Utilities Fund, declined 9 percent.
"I'm not sure that many utility funds are fulfilling their original role, which was for safety and income," said Russel Kinnel, director of research at Morningstar Inc.
Deregulation created a new distinction between power generators and distributors and also enabled them to go into unrelated businesses that promised more growth, such as telecommunications. The California debacle that led to the bankruptcy of PG&E Corp and now Enron's woes prompted investors to yank US$1.42 billion out of utilities funds this year, according to AMG Data Services, a research firm based in Arcata, California. That's up from the US$148 million they withdrew last year.
On average, US$31 million has left utilities funds each week since the end of September, AMG said.
The Profunds Utilities UltraSector ProFund has declined 40.7 percent, the worst among its peers, this year. The Touchstone Utility Fund is down 32 percent and the Invesco Utilities Fund has lost 31.8 percent.
Enron shares have declined 94 percent this year. The stock, which closed under US$5 on Friday, had soared to a high of US$90 in August last year after the company in the late 1990s began shedding assets as it transformed into an energy trader from a power producer. Its dealings with affiliated partnerships led to earnings restatements, credit-rating cuts and a management shakeup.
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