At Last, Telecom Funds’ Numbers Are Up

The phone is finally ringing for telecom mutual fund investors.

After suffering through subpar returns in 1995 and 1996, telecom fund shareholders have reaped a bonanza over the last 12 months.

The telecom fund sector has been the top domestic stock fund category so far this year, with a 22% average total return through Friday, according to fund tracker Morningstar Inc.

That handily beat the 14.7% return on the blue-chip Standard & Poor’s 500 index in the same period.

Over the last 12 months, the average telecom fund has shot up 49.3%, versus a 36.6% S&P; return, according to Morningstar.

The funds--which number about a dozen in all--have ridden the resurgence of interest in the telecom sector overall, including phone companies, equipment makers and wireless communications firms such as cellular phone companies.

“Mergers, greater competition for long-distance and local services, and growing demand for services both domestically and abroad have spurred growth” and interest in the telecom sector, Morningstar analyst Jon Hale noted in a recent report.

Whether the sector can remain hot in the near term is anyone’s guess, of course. Longer-term, however, it’s a good bet that the demand for telecom services in an increasingly “connected” world--where communication is everything--is certain to grow at a brisk pace.

The question, however, is which telecom companies will profit handsomely from that growth and which may be pushed aside by stronger competitors or new technologies.

MIT economist Lester Thurow notes that one big reason for the merger mania among phone giants today is that companies themselves are unclear which areas of the burgeoning global telecom industry will be meaningfully profitable in the long run and which will be only marginally profitable.

Hence, a company like SBC Communications--which bid for Baby Bell sibling Ameritech on Monday--wants critical mass both in terms of local phone service and, SBC hopes, someday in long-distance as well.

“Nobody knows where the money is going to pop up” in the telecom field in the long run, Thurow said.

On one level, that makes telecom mutual funds a natural choice for investors who want to have a dedicated portion of their portfolios in the telecom field but who don’t have time to assemble and track a group of individual stocks.

But as Morningstar’s Hale notes, telecom funds “are a fairly disparate group, so it’s a good idea for those interested in some communications exposure to look under the hood before making a choice.”

Fidelity’s Select Developing Communications fund, for example, has been focusing on telecom equipment makers and the tech firms that supply them. Its biggest holdings recently were Cellstar Corp. and Brightpoint Inc., two cellular phone distributors.

Another Fidelity fund, Select Telecommunications, has been heavily invested in telephone services companies, including long-distance rivals WorldCom Inc. and AT&T; Corp., and wireless firm Nextel Communications.

A brief summary of some of the other telecom funds:

* The Montgomery Global Communications fund has invested mostly in foreign telecom issues, such as Telecom Italia; Portugal Telecom; and Germany’s Mannesmann, now Europe’s largest private phone company.

Nearly 75% of the fund’s stocks have been foreign issues of late, so this fund is for investors who either believe that foreign growth in demand for telecom services will be stronger--and more profitable--than U.S. demand, or that foreign telecom shares may be greater values today than U.S. shares.

* The Flag Investors Telephone Income fund, which is changing its name to Flag Investors Communications Fund, has evolved over the last four years “from a dividend-oriented telephone utilities fund to one that has its hands in all major telecom sectors,” Hale says.

The fund has been the sector leader over the last 12 months, helped by big positions in SBC, America Online, WorldCom and Lucent Technologies.

* Gabelli Global Telecom, like the Montgomery Global Communications fund, targets many foreign-based telecom issues.

With these funds, investors have to be aware that the risks are commensurate with the opportunities. For example, if investors sour on stocks of developing countries--as occurred in Asia last year--these funds will suffer. Major foreign-currency swings also can hurt--or help.

Overall, while the telecom fund sector has had a spectacular run over the last 12 months, the five-year average annual return of the group, at 19.9%, trails the 23.2% return on the Standard & Poor’s 500 index in the period.

Still, most fund sectors have trailed the S&P.; Telecom funds have, on average, narrowly beaten the performance of the average general U.S. stock fund over the last five years.

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Tops in Telecom

Here is a sampling of some of the biggest stock mutual funds that focus on telecommunications and media stocks. The telecom sector has been the biggest gainer among domestic stock fund categories this year, but the funds’ five-year results trail the blue-chip Standard & Poor’s 500-stock index.

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Total return, through Fri.: Fund 800 phone YTD 1 yr. 5 yrs.* Montgomery Global Comm. 572-3863 +42.5% +52.8% NA Fidelity Select Telecomm 544-8888 +27.2 +57.6 +21.9% Flag Investors Tel. Income A 767-3524 +25.8 +65.4 +22.4 Invesco Worldwide Commun. 525-8085 +25.0 +57.2 NA GT Global Telecom A 824-1580 +22.7 +36.5 +15.3 TCW/DW Global Telecom B 526-3143 +21.2 +42.4 NA T. Rowe Price Media/Telecom 638-5660 +21.1 +57.2 NA Gabelli Global Telecomm 422-3554 +19.6 +51.7 NA Fidelity Select Dev. Comm. 544-8888 +19.2 +32.2 +19.4 Fidelity Select Multimedia 544-8888 +16.4 +53.1 +23.0 Smith Barney Telecomm Income 451-2010 +13.2 +51.1 +20.5 Avg. telecom fund +22.0 +49.3 +19.9 S&P; 500 index +14.7 +36.6 +23.2

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*Average annualized return

NA: Not available (fund didn’t exist for entire period)

Source: Morningstar Inc.