Companies that operate in the utilities sector include those that provide specific services to the public based on total demand, such as water companies, electric companies and natural gas companies. Because there are no viable substitutes for water, electricity and natural gas on the market, and needs for these resources continue to grow, the utilities industry experiences constant demand from consumers. The utilities industry provides ample opportunity for investors to participate in an equity market that has a longstanding history of consistent returns and steady dividend payouts due to the high level of demand. While investors can purchase the stock of individual utility companies, pooled investments such as mutual funds offer easy entrance into the industry with less overall risk.
While utilities mutual funds offer investors clear benefits in terms of potential return and income from dividends, the sector is not without risk. While most consumers depend on fossil fuels, the material from which most utilities are derived, strategic research and development has begun to develop alternatives that could present challenges to the utilities industry as a whole. Additionally, regulatory changes imposed on utilities companies could create the need to scale back on dividend payments to shareholders and may lead to stagnant growth over time. Due to the inherent risks of utility company stocks, investors should consider holding a utilities mutual fund as an alternative position that makes up a small portion of an otherwise diversified portfolio that includes equity and debt securities, and domestic and foreign exposure.
Hennessy Gas Utility Fund
Established in 1989, the Hennessy Gas Utility Fund is made available to investors through the Hennessy Funds group and is managed by Winsor Aylesworth. The mutual fund seeks to generate a combination of capital appreciation and income by investing at least 85% of fund assets in equity positions that mimic the performance of the American Gas Association Stock Index. The majority of companies listed on the American Gas Association Stock Index operate in the fields of natural gas distribution and transmission. The Hennessy Gas Utility Fund includes equity securities in the domestic and international markets, and it currently manages $1.71 billion in assets.
Since the fund's inception, the Hennessy Gas Utility Fund has generated a 10-year annualized return of 10.34%. The mutual fund does not impose a sales charge, or load, on investors purchasing or redeeming shares, but a minimum initial investment of $2,500 is required. The mutual fund has a relatively low expense ratio of 0.77% compared to the category average for utilities mutual funds of 1.18%. Top holdings within the Hennessy Gas Utility Fund include Spectra Energy Corp Common Stock at 5.09%, Williams Companies at 5.07%, Dominion Resources at 5.03%, Enbridge at 5% and Kinder Morgan at 4.97%.
Fidelity Telecom and Utilities Fund
The Fidelity Telecom and Utilities Fund is made available to investors through Fidelity Investments, a leader in mutual fund offerings for institutional and individual investors. Fidelity launched this fund in November 1987, and Douglas Simmons has served as its lead fund manager since 2005. The mutual fund seeks to generate a high total return by combining current income and capital appreciation derived from investing a minimum of 80% of fund assets in securities of telecommunication services companies and utility companies. The fund's investment mix includes domestic and foreign issuers, and each company is evaluated based on its financial strength, stability and industry position. The non-diversified fund holds more than $876 million in investor assets as of September 2015.
The Fidelity Telecom and Utilities Fund has generated a 10-year annualized return of 6.97%, with an expense ratio of 0.81%. While the expense ratio for the fund is lower than the category average, investors are required to invest a minimum of $2,500 for non-qualified accounts and IRAs. The mutual fund does not impose an up-front or deferred sales load to investors, however. The Fidelity Telecom and Utilities Fund invests 49.12% of fund assets in the utilities sector, with top holdings including NextEra Energy at 7.99%, Exelon Corporation at 5.95%, Sempra Energy common stock at 5.71%, Dominion Resources at 4.94% and OGE Energy Corporation at 2.62%.
Prudential Jennison Utility Fund
The Prudential Jennison Utility Fund was established in 1990 and is made available to investors through Prudential Investments. As of September 2015, the mutual fund holds $3.55 billion in fund assets, and its manager is Ubong Edemeka. The Prudential Jennison Utility Fund seeks to provide investors a total return through the combination of current income and capital appreciation. Typically, Edemeka invests a minimum of 80% of fund assets in equity and equity-related securities of utility companies, but up to 50% of assets can be used to purchase foreign securities at the fund manager's discretion. The non-diversified fund utilizes a value investment style to evaluate which equity securities to purchase.
As of September 2015, the Prudential Jennison Utility Fund has generated a 10-year annualized return of 8.71%. The mutual fund has an expense ratio of 0.82% and requires a minimum investment of $2.500 for non-qualified accounts. Although investors are not charged a deferred sales load upon redemption, the mutual fund does assess an upfront sales charge of 5.5%. Top holdings within the Prudential Jennison Utility Fund include SBA Communications Corp. at 3.43%, NextEra Energy at 3.43%, CMS Energy Corporation at 3.37%, Sempra Energy common stock at 3.37% and Edison International common stock at 3.06%.
MFS Utilities Fund
Established in 1992, the MFS Utilities Fund is made available to investors through the MFS group, and Maura A. Shaughnessy has managed the fund since its inception date. The mutual fund seeks to provide investors a total return by investing a minimum of 80% of the fund's $5.47 billion assets in securities of utility company issuers. The fund manager includes companies that are involved in manufacturing, producing, generating, transmitting, selling and distributing electricity, gas and other types of energy. The fund may also invest in equity securities of telecommunications companies, including those involved in wireless, telephone or cable operations. The mutual fund holds 28.98% of fund assets in foreign issuers, with the remaining assets invested in domestic equities.
As of September 2015, the MFS Utilities Fund has generated a 10-year annualized return of 10.31% with an expense ratio of 0.97%. The mutual fund is sold as a Class A share, meaning an up-front sales charge of 5.75% is assessed to investors when the fund is purchased. No deferred sales load is charged upon redemption, however. The initial investment required for the MFS Utilities Fund is $1,000 for non-qualified accounts. Top holdings within the fund include NextEra Energy at 3.65%, PPL Corporation at 3.47%, Exelon Corporation at 3.19%, Sempra Energy at 2.88% and Public Service Enterprise Group at 2.66%.