Ill Communications: Finding Winners Among the Battered Telecom Funds

The brutal drop in spending on telecom equipment has thumped communications funds to the canvas, but their penchant for ringing up big gains might intrigue steely-eyed Nasdaq fans. So let's check them out.

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These funds, which once feasted on the shares of sleepy, dividend-paying telephone companies, now typically straddle the telecom and technology sectors. Telecommunications funds, also called communications funds, have some 40% of their money stowed in the tech sector, on average, according to Morningstar.

As you might imagine, they rode the Nasdaq to jaw-dropping returns in 1998 and 1999, when they gained 46% and 68.3%, respectively. A prescient and hypothetical $10,000 investment in the broker-sold, $1.4 billion (TISHX)Deutsche Flag Communications fund, the category's largest fund, at the start of 1998 would've grown to more than $25,000 by the end of the following year.

But dipping corporate spending on all things tech hit these funds hard. Over the past year the average communications fund is down more than 46%, hacking away much of the previous years' gains.

Communications Breakdown It's been a tough year for communications funds, but over the long haul they've done well
	Avg. Communications Fund	S&P 500
1-Year Return	-46.2%	-14.5%
5-Year Return	13.1	14.9
10-Year Return	17.1	15.1
Source: Morningstar. Returns through June 13.

But if you're thinking the need to build out the Internet and upgrade communications networks will drive earnings growth after the sector's current malaise, you might want to pick through the bin. We've shown you how to add sector funds to a diversified portfolio -- limiting them to 10% or less of your assets. And a look at the numbers shows why you might be interested in communications funds. A portfolio with 90% of its money in the (VFINX)Vanguard 500 Index fund, which tracks the S&P 500, would've averaged a 15.4% average annual gain over the past 10 years, according to Morningstar. Even after the sector's stunning losses, that beats the S&P 500 by 0.2 of a percentage point.

To find some worthy candidates, we sifted the 26-fund pack for those that beat their average peer over the past one- and three-year periods -- a tumultuous stretch. We also yanked out any funds with annual expenses north of the category's 1.52% average, according to Morningstar. That left us with a trio of funds, so let's check them out and then look at one or two other solid options that missed our cut.

Best of Breed These few funds have topped their peers over one-year and three-year periods
Communications Fund	3-Year Return	1-Year Return
(PRMTX)T. Rowe Price Media & Telecommunications	18.5%	-27.4%
(FBMPX)Fidelity Select Multimedia	14.1	-6.7
(TISHX)Deutsche Flag Communications	8.0	-36.1
Avg. Communications Fund	6.5	-46.2
S&P 500	5.5	-14.5
Source: Morningstar. Returns through June 13.

Robert Gensler has run the no-load (PRMTX)T. Rowe Price Media & Telecommunications fund only since February 2000, but he has distinguished himself. He's taken a broad view of the sector by spreading the fund's money among technology, phone service and media stocks like his predecessor, Brian Stansky --- brother of (FMAGX)Fidelity Magellan manager Bob Stansky. The fund's 18.5% three-year annualized return beats 89% of its peers and tops the S&P 500 by 13 percentage points, according to Morningstar. Gensler topped his average peer in a tough 2000 and the fund's 27.4% fall over the past 12 months beats 89% of its competitors.

If you're looking for diversified exposure to the sector, you might also check out the broker-sold Deutsche Flag Communications fund, where Bruce Behrens has been lead manager since 1984, with Liam Burke joining him as a co-manager in 1997. The pair sift the sector for companies with solid growth, a healthy balance sheet and an attractive valuation relative to their peers. (For more on their approach, check out this recent 10 Questions interview.)

The strategy might sound vanilla, but its results are eye-catching. The fund beats its average peer over the past one-, three-, five- and 10-year periods, according to Morningstar. It has also held up well in the current storm, with a 13.4% loss this year that beats 70% of its competitors.

The (FBMPX)Fidelity Multimedia fund, which carries a maximum 3% sales charge, has a communications label, but isn't a great choice if you're after telecom exposure. The fund, run by Victor Thay since the start of this year, invests primarily in media and entertainment companies like Walt Disney and newspaper giant Gannett, publisher of USA Today, among other papers. While the fund does top its peers and the S&P 500 over the past one-, three-, five- and 10-year periods, it's not really a telecom fund.

Two funds that narrowly missed our cut but are worth a look are the aggressive (ISWCX)Invesco Telecommunications fund and the less racy (GABTX)Gabelli Global Telecommunications fund.

Brian Hayward, manager of the no-load Invesco fund since 1997, focuses on tech and telecom companies with outsize earnings growth, often paying up for highfliers. Predictably, that's led to high highs and low lows -- it gained 144% in 1999, but lost more than a quarter of its value last year. The fund's 18.6% annualized gain over the past five years tops nearly all its peers. It didn't survive our screen because its 54.3% loss over the past 12 months lags 57% of its competitors.

The no-load Gabelli fund, run by the father-son team of Mario and Marc Gabelli since its inception, follows a less aggressive strategy. The pair look for companies with solid growth, buying shares if they think a firm's stock price doesn't reflect the true value. The fund beats its average peer over the past one-, three- and five-year periods, according to Morningstar. Over the past five years it's averaging a 17.4% annual gain, beating 91% of its peers, and its 28.4% loss over the past 12 months means it held up better than 85% of the telecom funds out there. Why did the fund miss our cut? Its 1.60% annual expense ratio is just barely above the category average.

There you have it, a short list of telecom funds for the battered sector's true fans.

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