The Daily Screen: The Best Telecommunications Funds

Let's just say communications stocks and funds are getting their bells rung this year.

These funds, which tend to blur the line between tech and telecom, rode networking and wireless stocks to a 70.1% return on average last year when Wall Street saw unlimited growth for those shops. But this year valuation fears and some growth jitters for bellwethers such as Nokia(NOK Quote), down 17% this year, and Nortel Networks(NT Quote), down 21% since Jan. 1, have whacked these funds. Their long-term returns still smoke the S&P 500's, but their average 18.7% loss since Jan. 1 is the worst among all U.S. stock fund categories.

Poor Communications The sector's had a tough time this year.
	Avg. communications fund	S&P 500
YTD return	-18.7%	-5.3%
1-year return	3.4	7.6
5-year return	24.6	20.9
10-year return	24.3	19
Source: Morningstar. Annualized performance figures through Oct. 31.

That said, there are some survivors here and reasons to look at them. If you like the idea of investing in the companies that make voice, data and Net connections faster and cheaper, these funds might be worth a look for 5% or so of your portfolio. This year is the category's worst since 1990, when the average communications fund lost 13%, so you might be looking at the worst-case scenario.

We've sifted the category for those funds that beat their average peer over the past one- and three-year time periods. Five funds made the cut and here they are, ranked by one-year return. We'll check these out and then pick through their cumulative top-10 holdings to see where they've placed their bets.

Leading Communications Funds The few, proud outperforming communications funds over one- and three-year periods.
Fund	1-year return	3-year annualized
(ISWCX Quote)INVESCO Telecommunication	31.2%	49.4%
(FSDCX Quote)Fidelity Select Developing Comm	29	48.3
(WPGTX Quote)Warburg Pincus Global Telecom.	16	53.4
(PRMTX Quote)T. Rowe Price Media & Telecom	7.3	33.7
(MNGCX Quote)Montgomery Global Communications R	6.4	32.8
Avg. comm. fund	3.4	31.2
S&P 500	7.6	17.9
Source: Morningstar. Annualized performance figures through Oct. 31.

At the top of the list is (FSDCX Quote)Fidelity Select Developing Communications, which typically focuses on stocks of big-cap networkers. It's just one of the behemoth Boston fund company's three communications funds -- the other two are (FBMPX Quote)Fidelity Select Multimedia, down 15.6% since Jan. 1, and (FSTCX Quote)Fidelity Select Telecommunications. The former focuses mainly on media and broadcasting stocks and the latter is a broader fund with more exposure to traditional telephone stocks like the Baby Bells.

Fidelity has the deepest corps of analysts in the fund business. That often keeps its sector funds ahead of the pack despite an aggressive style and frequent manager changes. One thing you might want to keep in mind is that this each fund in this trio charges a maximum 3% front-end load or sales charge.

Like Fido's Select Developing Communications fund, the no-load (ISWCX Quote)Invesco Telecommunications fund typically gulps down shares of networking companies. The fund, down 7.8% since Jan. 1, beats more than 90% of its peers over the last one-, three-, and five-year time periods, according to Morningstar. For an idea of how the fund invests along a connectivity theme, check out this Oct. 16 interview with portfolio manager Brian Hayward, who has held the reins since 1997.

In addition to the funds on our list, look at the broker-sold (TISHX Quote)Flag Investors Communications fund, where Bruce Behrens has been the lead manager since the fund's 1984 inception. The fund's broad sector exposure and low turnover might make it an intriguing option for some investors.

If you're looking for a less aggressive approach, look at the no-load (GABTX Quote)Gabelli Global Telecommunications fund. Co-managers Mario and Marc Gabelli sift the sector for stocks selling for less than their peers or for less than their breakup value. The approach has led to lower volatility than the average communications fund but competitive returns.

For a look at which stocks the leading communications funds favored, check out the list below. It's rife with networking stocks like the top-four cumulative holdings: Cisco Systems(CSCO Quote), Juniper Networks(JNPR Quote), JDS Uniphase(JDSU Quote) and Nortel.

There's also a dollop of bruised wireless stocks like Vodafone (VOD Quote), Motorola (MOT Quote), and Nokia, all of which are down for the year.

On average these 10 stocks are up 12%, but a closer look shows what a tough year it has been. Seven of these 10 stocks have been under water since Jan. 1, but those picks that have risen have rocketed: Juniper, up 194%; Corning(GLW Quote), up 65.2%; and Broadcom(BRCM Quote), up 56.2%.

Under the Hood The stocks with the biggest weighting in the combined portfolios of the five above funds.
Stock	Weighting in Top Five Funds	Number of Top Five Funds Owning the Stock
Cisco Systems(CSCO Quote)	3.1%	5
Juniper Networks(JNPR Quote)	2.1	2
JDS Uniphase(JDSU Quote)	2	3
Nortel Networks(NT Quote)	1.7	5
Vodafone Airtouch(VOD Quote)	1.7	4
Motorola(MOT Quote)	1.6	3
Corning(GLW Quote)	1.5	4
Nokia(NOK Quote)	1.5	4
WorldCom(WCOM Quote)	1.4	3
Broadcom(BRCM Quote)	1.3	3
Source: Morningstar. Holdings as of funds' most recent portfolio reports.