Judith A. Saryan, whose Eaton Vance Utilities Fund was the third-best performer in its class in the past 12 months, expects her holdings in TXU Corp., Edison International and Exelon Corp. to gain from high energy prices.
About 10 percent of the $911 million mutual fund is in TXU, Texas's largest power producer; Edison International, the owner of California's No. 2 utility, and Exelon, the largest U.S. utility owner. The stocks jumped as much as 60 percent this year because the companies set prices based on oil and gas and produce power at a lower cost using coal and nuclear facilities, Saryan said.
"You're seeing their margins expand tremendously because power prices are going up and the cost of generation is, in effect, not going anywhere," Saryan, 51, said in an interview at Eaton Vance Corp.'s offices in Boston.
The Eaton Vance fund rose 32 percent in the past 12 months, data compiled by Bloomberg show. Utilities are the biggest gainers after natural resources funds among sector funds, meaning those that concentrate assets in a specific industry. The Jennison Utility Fund, up 41 percent, and the ProFunds Utilities UltraSector Fund, up 36 percent, are the category's top performers.
Saryan's fund invests in electric, gas, water and telecommunications stocks. About 56 percent of the fund is in electric utilities, and 25 percent is in telecom companies such as BCE Inc., Canada's biggest telephone carrier. Thirty-six percent of the assets are invested outside the United States, which is a larger proportion than for most utilities funds.
Rising oil and natural gas prices helped the fund, Saryan said. Dallas-based TXU was allowed in September to raise customers' rates after natural-gas prices gained because of hurricanes Katrina and Rita. Both storms damaged production platforms and rigs as they moved through the Gulf of Mexico.
TXU shares, which closed Friday at $100.50, almost tripled in 2004 and climbed another 60 percent this year. Edison International's stock, which ended the week at $43.50, rose 59 percent in the past 12 months, and Exelon, which closed Friday at $48.65, gained 28 percent.
"They're like closet energy plays" because investors can buy and sell shares as a bet on the direction of oil prices, said Saryan, who has been analyzing utilities for 26 years.
Eaton Vance analysts expect crude oil to sell for $40 to $60 a barrel for the next two to five years because global demand is rising, she said. Oil averaged $35 in the past five years and traded Oct. 12 at $64.12, Bloomberg data show.
"We aren't looking for prices to run up from where they are now, but we think they're going to stay at a higher level than most analysts are expecting," Saryan said.
Saryan, a Wellesley College graduate, has managed the fund since joining Eaton Vance in 1999 from Boston-based State Street Corp. She and a team of five analysts focus on companies with above-average cash flow and dividends whose shares trade at a discount of 10 to 15 percent to the average utility.
The Eaton Vance fund rose at an average annual rate of 6.2 percent in the past five years, compared with the average decline of 4.5 percent for competing utilities funds.
Investors typically buy utilities stocks for their dividend yields. The 15 companies in the Dow Jones Utilities Average have an average yield of 3.2 percent, compared with the 2.1 percent of the benchmark Standard & Poor's 500-stock index and the 10-year Treasury note's 4.4 percent.
Utilities' dividends may lose their appeal if interest rates continue to rise, Saryan said. Federal Reserve policymakers have lifted the overnight bank lending rate 11 times since June 2004, most recently on Sept. 20, when it was increased to a four-year high of 3.75 percent.
Saryan holds telecom stocks such as Montreal-based BCE, which have dominant positions in the traditional land-line telephone business.
They tend to turn income from those services into dividends, she said. BCE pays a dividend of 4.3 percent. Verizon Communications Inc., the largest U.S. local phone company and one of the fund's 10 biggest holdings, increased its quarterly dividend in March and the stock now has a yield of 5.4 percent. It finished the week at $29.90 a share.
"You're still seeing a lot of cash flow being generated by the fixed-line business," Saryan said. The cash also helps older companies invest in broadband or video to fend off cable television and information technology companies, she said.
Verizon has teamed up with SBC Communications Inc., the largest local telephone provider in 13 states, to seek statewide licenses in Texas to sell television programming for the first time. "We're still in a time when there's going to be a lot of turmoil in this business, and it isn't clear yet how it's going to come out for every one of the players," Saryan said.