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Utilities not such a safe haven

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If you know any investors who still own a utility fund because they think it's a safe bet, get in touch with them immediately.

Utility funds were once the stock market's ultimate safe harbor. While their net asset values oscillated with interest rates, they delivered healthy monthly dividend checks, making them popular among retirees.

But in April, Wiesenberger, a fund research firm, found that even as the Dow Jones utility index rose 9.6 percent, the average utility fund fell 4 percent. According to Morningstar, the average utility fund has only 42 percent of assets in utilities and yields just 1.75 percent.

Fidelity Utilities (800-544-8888; www.fidelity.com — the top-performing no-load utility fund over the past three years, with an annualized 25-percent return — has just 15.4 percent of assets in utilities. Only one of its top ten holdings is an electric utility. The others include telecommunications stocks, such as Sprint PCS, Nextel, Nokia, VoiceStream Wireless, Vodafone AirTouch and MCI WorldCom.

The change in utility funds' focus reflects a change in the utilities industry, says John Schniedwind, a member of the team that manages American Century Utilities (800-345-2021; www.americancentury.com. "The whole sector is going through an evolutionary process."

The days of lazy electric companies, with legal monopolies and public rate-setting boards are drawing to a close. Nearly half the states have enacted some sort of deregulation. Similar changes have already transformed the once-placid telephone industry.

The American Century fund is a middle-of-the-road offering, less volatile than the Fidelity fund but more venturesome than Strong American Utilities or Invesco Utilities (see below). It has returned an annualized 22.5 percent over the past three years.

"Grandma's utility stocks," says Brian Hayward, manager of Invesco Utilities (three-year annualized return, 22.8 percent; 800-525-8085; www.invescofunds.com "are a thing of the past."

Still, Hayward buys mainly telephone companies and electric utilities to end up with less volatility than the Fidelity and American Century funds.

Competitive pressures have also led managers afield, says William Reaves, manager of Strong American Utilities (800-368-1030; www.strongfunds.com. "That's fine as long as investors understand what they are getting. They're getting things like Qualcomm and a lot of foreign utilities."

Like Invesco's fund, the Strong fund doesn't stray far from its focus. Reaves invests mainly in electric utilities and major oil companies. His fund has returned an annualized 17.2 percent over the past three years.