T. Rowe's Gensler Smells Cash in Telecom

If the mutual fund world had a comeback-of-the-year award, communications funds would surely be in the running.

After being left for dead in the wake of the bubble's collapse, telecom funds showed a strong bounce last year. But unlike a lot of other fund categories that rebounded in 2003 only to lose momentum in 2004, communications specialty funds have maintained their gains. The average fund has returned 18.1% this year, making it Morningstar's fourth-best performing group. The sector finds itself behind natural resources, real estate and utilities funds -- three obvious all-stars in the current low interest rate, high oil price environment.

Robert Gensler, portfolio manager of the $766 million (PRMTX Quote)T. Rowe Price Media & Telecom fund, says the group is entering a postbust reality phase. To him, this means these stocks are finally being appreciated for their ability to generate cash.

He adds that despite the rush overseas to take advantage of the declining dollar, U.S. telcos might be the best place for investors in the current regulatory environment. According to Morningstar, Gensler's fund, which stretches the boundaries of the category to include media, Internet and entertainment stocks (as well as a few other surprises), is up 18.9% for 2004. That's 11 percentage points better than the S&P 500.

TheStreet.com recently had its own set of communications with Gensler to find out what's behind the comeback and whether it can continue through 2005.

Communications funds have had a surprisingly strong performance this year so far. What is propelling them?

I think it's a lot of little things, but most of all what you are seeing is a follow-through from last year's rally. In telecom you had the boom, then the bust, and now you have what I call the reality.

The reality is that many of these companies have great free cash flow and are still growing. It may be modest growth, but it's growth nonetheless. What happened during the boom-bust cycle is that many investors threw the baby out with the bath water. In 2003, the group did very well as a lot of these stocks rose from the ashes. This year we have seen some follow-through.

Communication Breakout T. Rowe Price Media & Telecom Fund
	Fund	Ticker	YTD %	Annual Returns %			Expense Ratio %
				2003	2002	2001
	T. Rowe Price Media & Telecom	PRMTX	18.88	56	-28.4	-6.9	1.1
	S&P 500 Index	--	7.78	28.7	-22.1	-11.9	--
Source: Morningstar (annual returns through 11/17/04)