TheStreet.com Ratings
TheStreet.com Ratings: Power for Your Portfolio
By Sam Patel
Manager of Mutual Fund Research
9/20/2006 9:40 AM EDT
URL: http://www.thestreet.com/funds/ratings/10309806.html
The U.S. economic outlook seems to change from day to day, depending on, among other things, the latest round of economic data or whether the Federal Reserve issues a statement. In such a volatile environment, utility funds offer investors seeking a healthy yield from dividend income a good alternative to the bond market. Private and professional investors are now leaning toward sectors that show more strength in a cooling economy, and utilities allow them to take a position in basic services that will continue to be in demand no matter the economic scenario. In terms of performance, this sector is less sensitive than bonds to interest rate movements and more reliant on the pricing of its contracts. From our ratings database, one family of equity mutual funds stands out: the Jennison Sector Funds, which are managed by Prudential. I've chosen to highlight one fund from this family: the Jennison Utility Fund, which carries TheStreet.com Ratings' highest grade possible, an A-plus. When TheStreet.com Ratings examines utility funds, it likes to see a concentration of holdings in energy, especially electrical and gas, which serves as a defensive play in the event of a severe slowdown. We also look for funds with holdings in other areas capable of generating a steady income stream, and funds with at least a 20% allocation to overseas markets, because our research indicates that funds with an international component have consistently outperformed purely domestic-focused funds across industries and sectors.
Three Principles
We like Jennison Utility because it embodies our three principles for selecting a utility fund. First, its holdings are concentrated in energy, with nearly 57% of its assets invested in the sector: 39.38% in electrical energy, 10.02% in oil and gas and 6.05% in gas. The fund also invests in other sectors, generating stable dividend streams from its holdings in airports, seaports and water, cable and toll-road companies. Finally, Jennison Utility offers investors exposure to overseas markets, with 29.3% of its $4.5 billion in assets held in foreign investments, notably the U.K. (7.63%), Germany (4.17%), Canada (3.88%) and Mexico (2.77%). The following is a list of all the power- and energy-related securities in Jennison Utility's portfolio. In general, these companies are involved in the areas of exploration/mining, production, distribution and marketing of electrical or gas energy.
Jennison Utility Fund Holdings
|
| Security Description | Ticker Symbol | % of TNA |
| TXU Corp. | TXU | 4.7 |
| Questar Corp. | STR | 3.4 |
| Sempra Energy | SRE | 3.3 |
| Williams Cos, Inc. | WMB | 2.9 |
| Equitable Resources, Inc. | EQT | 2.6 |
| DPL, Inc. | DPL | 2.2 |
| RWE Ag | RWE | 2.1 |
| PPL Corp. | PPL | 2 |
| Edison International | EIX | 2 |
| NRG Energy Inc | NRG | 2 |
| Exelon Corp. | EXC | 1.9 |
| DRAX Group Plc | DRX | 1.9 |
| EL Paso Corp. | EP | 1.9 |
| FPL Group, Inc. | FPL | 1.8 |
| Allegheny Energy, Inc. | AYE | 1.6 |
| E.ON Ag Spsd Adr | EON | 1.5 |
| AGL Resources, Inc. | ATG | 1.3 |
| Scottish & Southern Energy | SSE | 1.2 |
| Enterprise Group Holdings | EPE | 1.2 |
| Endesa S.a. - Sponsored Adr | ELE | 1.2 |
| Crosstex Energy Inc | XTXI | 1.2 |
| ENEL Spa | ENEL | 1.1 |
| Oneok, Inc. | OKE | 1.1 |
| Aquila, Inc. | ILA | 1.1 |
| Scottish Power Plc | SPW | 1.1 |
| Firstenergy Corp. | FE | 1 |
| Southern Union Co. | SUG | 1 |
| Nexen, Inc. | NXY | 1 |
| PNM Resources, Inc. | PNM | 1 |
| Valero Energy Corp. | VLO | 1 |
| DUKE Energy Corp | DUK | 0.9 |
| Kinder Morgan, Inc. | KMI | 0.9 |
| Windstream Corp | WIN | 0.9 |
| CNX Gas Corp | CXG | 0.9 |
| CMS Energy Corp. | CMS | 0.8 |
| Sunoco, Inc. | SUN | 0.8 |
| Cleco Corp. | CNL | 0.8 |
| Reliant Resources, Inc. | RRI | 0.8 |
| Cheniere Energy Inc | LNG | 0.7 |
| Enagas | ENG | 0.7 |
| Fortum Oyj | FUM1V | 0.6 |
| Alliance Holdings Gp Lp | AHGP | 0.6 |
| Entergy Corp. | ETR | 0.5 |
| Ormat Technologies Inc | ORA | 0.5 |
| Alpha Natural Resources Inc | ANR | 0.5 |
| Suncor Energy, Inc. | SU | 0.5 |
| Dynegy, Inc. | DYN | 0.5 |
| Energen Corp. | EGN | 0.5 |
| Energy Transfer Equity Lp | ETE | 0.5 |
| Unisource Energy Corp. | UNS | 0.5 |
| Atlas Pipeline Holdings Lp | AHD | 0.4 |
| CNX Gas Corp-144a | CNXGY | 0.2 |
| Evergreen Solar Inc | ESLR | 0.1 |
| Copano Energy Llc | CPNO | 0.1 |
| Source: TheStreet.com Ratings |
The fund's year-to-date return is a very impressive 16.62%, which represents a total return from both dividends and capital gains. This easily beats the fund's benchmark, the S&P Utility Total Return Index, which has yielded only 5.43% year to date. The Jennison prospectus states that $10,000 invested in the fund in 1996 has grown to $33,912 in 2006, which gives a very respectable 12.98% compounding rate over the 10-year period, assuming reinvestment of all distributions. Investors should take note, however, of Jennison Utility's fees and expenses, which are higher than average, starting with a front load of 5.5%, an expense ratio of 0.8% and a 12b-1 fee of 0.3%. In general, utility funds will have front-end load fees, while funds that invest overseas tend to charge higher fees. Together, these two factors likely account for the above-average costs. The fund's turnover is a very low 40%, which suggests that it changes its entire portfolio once every 30 months. Such a low turnover minimizes the tax implications for investors, because both capital gains and dividend distributions are taxed at the ordinary rate if they are generated in under 12 months. (As always, it's critical that investors seek professional advice from an accountant regarding their personal tax situation.) Clearly, this is a fund for longer-term investors comfortable with a buy-and-hold approach, especially since they are going to pay 5.5% up front to get in. If you believe the chances for an economic slowdown beginning in 2007 are good, consider buying Jennison Utility now and holding it until there is clear evidence of a resumption of sustainable U.S. and global economic growth.
Sam Patel, CFA, is the manager of mutual fund research for the TheStreet.com Ratings. In keeping with TSC's Investment Policy, employees of TheStreet.com Ratings with access to pre-publication ratings data must pre-clear any potential trade through the legal department, and are prohibited from trading any security that is the subject of an unpublished rating revision until the second business day after the rating is published. While Patel cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.
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