John Kohli is steering the $1.9 billion Franklin Utilities Fund to top-ranked returns by investing in companies that are boosting dividends and buying back stock.
"That's our focus," said Kohli, 38, in a telephone interview from his offices at Franklin Resources Inc. in San Mateo, Calif. "It's pretty straightforward. We look for utilities that are in a position to grow their dividend or repurchase stock."
Shares of Entergy Corp. and Dominion Resources Inc. helped Kohli's fund climb at an annual rate of 7 percent during the past five years, the best performance of 21 funds tracked by Bloomberg. The average utilities mutual fund fell at an annual pace of 0.8 percent in the same period.
Entergy, which runs electric utilities in four states, plans to buy back as much as $1.5 billion in stock. Dominion Resources, owner of Virginia's largest utility, in July raised its dividend for the first time in a decade. It's a turnaround for an industry that built up debt in the late 1990s as companies sought to keep up with returns like those being generated by now-bankrupt Enron Corp.
"There weren't many companies that completely escaped the problems of the last few years," Kohli said. "Today, the sector is in fundamentally sound shape."
The Franklin Utilities Fund invests about four-fifths of its assets in government-regulated utilities. The companies are steady performers with reliable income streams, Kohli said, helping the fund pay a 4 percent annual dividend.
Kohli attended the University of Nebraska on a baseball scholarship and then was signed by the Seattle Mariners organization. He pitched one season for a Mariners minor league team.
After graduating with a degree in accounting from the University of West Florida, he followed the suggestion of his brother Bill -- then with Franklin and now a portfolio manager with Putnam Investments of Boston -- and joined Franklin's management training program in 1992.
Kohli became a portfolio manager in the company's taxable money market funds group before joining the Franklin Utilities management team in late 1998.
His first year was inauspicious. In 1999, the fund held the stocks of more-traditional utilities -- companies generating electricity and supplying water -- while competing funds invested in companies such as Enron, which plied the energy trading markets before filing for bankruptcy in December 2001, and even Internet companies such as America Online Inc.
In 1999, Franklin Utilities was the worst-performing fund in its category, falling 16 percent. The next year, it led the category with a 42 percent gain, beating the average competitor by more than 33 percentage points.
"Did we fear that times were changing on a permanent basis and we were going to try to chase a different strategy? No, because we felt it was a cycle and we didn't know how long that cycle was going to last," Kohli said. "It didn't feel good at the time, but I'm glad we stuck with it."
The Franklin fund is a utilities fund that invests in utilities, unlike competing funds managed by firms such as Fidelity Investments and MFS Investment Management, said Paul Herbert, an analyst at Chicago research firm Morningstar Inc., which gives the fund its highest five-star rating.
"It's a relatively safe investment for people who want to track the utilities market," Herbert said in an interview. "To be sure, it will lose money as it did in 2002."
After Enron collapsed, utilities turned "back to basics," selling off side ventures and lowering their debt, Kohli said. Now the industry is enjoying strong cash flow from regulated businesses, and since investors don't want risky acquisitions or expansions, the companies have little choice but to buy back stock or increase dividends, Kohli said.
Entergy, based in New Orleans, agreed on Sept. 2 to sell an energy-trading company jointly owned with Koch Industries Inc. to Merrill Lynch & Co. Entergy said in a filing to the Securities and Exchange Commission that it expects cash proceeds of about $1 billion from the sale of the trading unit and the venture's natural-gas pipeline.
Entergy plans to make a decision about its dividend in November, said Kohli, who expects it to be raised as much as one-fourth above the 3 percent current yield. Franklin holds about 2.5 million shares of Entergy.
TXU Corp., whose stock has risen more than 80 percent this year, has been the "home run stock for the sector this year," Kohli said. Franklin Utilities began buying the stock in the low $20s this year and sold some shares when they traded at $40. The stock, now trading above $42, remains a top holding in the fund.
The Dallas company, owner of Texas's largest power company, has scaled back its holdings in overseas and non-electric operations. TXU also repurchased stock, announcing on June 30 that it had bought back 20 million shares.
Chicago-based Exelon Corp., the biggest owner of U.S. utilities by market value, on Aug. 19 raised its earnings targets for this year and 2005. In addition to boosting its dividend by 11 percent, Exelon indicated the payout ratio between its dividend and net income would rise to as much as 60 percent from about 40 percent, Kohli said.
"You're going to see strong dividend growth out of Exelon in the next year," he said.
Kohli has been buying shares of PG&E Corp., the San Francisco-based owner of California's largest utility. PG&E produces as much as $1 billion a year in free cash, and while the company does not pay a dividend, it should do so in early 2005, he said. Kohli bought the stock at about $20 last year and added to its position near the current price of $29.
"We think there's still good upside from here," he said. PG&E's Pacific Gas & Electric unit, California's largest utility, emerged from a three-year bankruptcy in April.
Franklin Utilities, sold by brokers, has a 4.25 percent upfront sales charge. The fund levies additional fees of $8.30 for every $1,000 invested, which is below the average $13.40 assessed by competing funds, according to Bloomberg data.