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Gabelli Utility Fund Likes Old-Fashioned Utility Stocks

Once upon a time, utility stocks were widow and orphan kinds of investments providing investors with a steady income stream. And, an investment that seemed to side-step the volatility of other types of companies like small company and growth stocks.

Then, the tech-hot 1990s came around and, along with it, deregulation in the utility sector. The end result, a number of utility companies moved away from what they knew best---power---and into industries they knew little about, like technology. That move hurt both utility investors and the entire industry.

"Many utilities went into risky businesses and saw a lot as their share values dropped, " says Barry Abramson, co-portfolio manager of the Gabelli Utilities Fund (1-800 -422-3554). " But today, the industry is coming back and getting back to basics."

He's right: Utility stocks are shining once again thanks, in part, to the recent tax-law changes (they reduced the taxes due on dividend income from an individual's marginal rate to a flat 15 percent) and because the industry has actively been cleaning up its act. As for utility fund performance, year-to-date, through October 23, the average utility fund was up over 13 percent, according to Lipper. The Gabelli Utilities Fund, (GABUX), was up over 21 percent over that same time period.

Currently, you'll find about 70 stocks of various market-cap sizes in the fund. Telecommunications stocks make up about five percent of the fund; gas companies about 15 percent; and electric utilities about 80 percent.

Abramson likes to invest in "low risk regulated" gas and electric utilities that are value priced; and ones ripe for takeover. Here's more from him about the fund:

Q: Can you help readers understand what deregulation meant in the utilities industry?

A: Deregulation began in other industries years ago and sectors like natural gas and electricity were sort of the last big regulated monopoly sector to get deregulated in the late 1990s. Today, about 24 states have deregulated the electric market.

That deregulation means that they have allowed competition; allowed customer choice so customers can choose their electric supplier. Where the choice comes from is the production of electricity.

You have to think of the electric utility industry in two parts; generation and then the delivery of power. Utility companies, for 100 years, were vertically integrated. That is, they built power plants to make electricity to generate power, then transmitted that power over long distance transmission lines, and then delivered that power to each house through a networks of wires running both underground and above ground.

Then they realized that the delivery was a natural monopoly but that the generation of power could be competitive. So, generation (of power) became deregulated in those 24 states, but the transmission and distribution of it remains a regulated monopoly in each of those states.. In the remaining states, there is no deregulation and everything remains the same as always.

Q: Do you prefer investing in regulated or deregulated companies?

A: We prefer the more traditional utility. But, the first thing we look for is value. Now even in the 24 deregulated states we can find companies with a regulated business that we like because they may be companies that operated the distribution network. One of them is Energy East, a company that operates in parts of New York, Connecticut and Maine. They sold off most of their power plants and kept their network of pipes and wires because they also are a gas utility. Nstar, the old Boston Edison, is another one we like.

Most of the southeast, however, has no deregulation and one company we like in this region is the FLP Group. And we like it for all of the old-fashioned reasons: growth in the region; they get fair regulatory treatment; have good financials; and good management. So their utility is top-notch, but they also have one other thing we like a lot---they have found a niche in the unregulated power business in other states by becoming the largest developer of wind power in America. Wind power--- or wind mills---is renewable energy and both are buzz words for clean energy that doesn't pollute. It's very much in vogue and it's very hard to build renewable energy because it doesn't work everywhere.

Q: What about the risks to investing in this fund.

A: If we have a really strong economic recovery and go back to a tremendous bull market in growth stocks, utility stocks would lag. The reason we like the sector right now is that we think we're in a period of economic recovery but, that recovery is going to be more modest and the growth with be at a slower rate. Utilities are never going to be the fastest growing sector in an environment of modest growth but they can be a very good place to be.

Q: Who is this fund ideally suited for?

A: The conservative investor who wants steady income and modest capital appreciation from a low-risk portfolio.

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