Originally created 10/14/02

Companies replacing risky utilities funds



NEW YORK - Battered by volatility and poor performance from utilities shares, several mutual fund companies are turning away from funds concentrated in electricity, water and telephone companies, once a safe haven for slow, steady growth.

The Vanguard Group, the second largest mutual fund company, is asking shareholders in December to approve replacement of its Vanguard Utilities Income fund to the Vanguard Dividend Growth fund, which would focus on dividend-paying companies from different industries.

Shareholders at First Investors will vote later this month on whether to change the company's Utilities Fund to the First Investors Value fund. And Strong last year replaced its no-load American Utilities fund with the Strong Dividend Income fund.

"The utilities industry, and what we considered the utilities sector, has changed so radically from the fund's inception in the early 1990s," said Jeffrey Molitor, Vanguard's director of portfolio review.

"What used to be considered widows-and-orphans' stocks has evolved to a highly volatile and nonregulated set of entities with much less focus on dividends and a greater focus on growth," he said. "They just pose a lot more risk."

Ten years ago, safe-haven investors relied on the government-regulated utility companies to provide a steady income of generous dividends. But deregulation in many states starting in 1996 changed that.

Many telephone and electric companies lost their monopolies and branched out into riskier ventures such as electricity trading and high-speed Internet access. In the process, many took on debt and trimmed dividends.

Accounting scandals at Enron and WorldCom this year also helped decimate stocks, hurting utilities funds' performance.

So far this year, the funds lost an average of 29.2 percent, according to fund tracker Lipper Inc. Over three years, utilities funds averaged a loss of 12 percent, while five years ago they declined about 1.9 percent.

Meanwhile, total assets in utilities funds through August dropped to $13.7 billion, down from $20.4 billion at the end of 2001.

At the same time, some utility funds remain promising because they continue to focus on state-regulated electric companies with good dividends, said Paul Herbert, an analyst at Morningstar Inc.