Pure-Play Wireless Funds Starting to Ring a Bell

Cellular phones and Palm Pilots are everywhere and investors are gaga for wireless stocks. How can mutual fund investors get in on the action?

One wireless-focused mutual fund just rolled out and another is on the way. There's also a menu of wireless unit investment trusts, or UITs. But if you own a technology fund, a telecommunications fund, or almost any growth fund, your portfolio already might have a big helping of wireless stocks.

What's the big deal with wireless? Beyond global cell phone demand at home and overseas, the next boom is wireless access to voice-mail, email, paging and the Internet via a cell phone, Palm Pilot, or similar hand-held "informational appliance."

Jupiter Communications says that at the end of 1999 there were about 72 million cellular phone subscribers, and estimates that figure will grow to 128 million by 2003. More than half of those 128 million users will have phones with Web browsers, the comapny says.

Sprint PCS (PCS Quote) already offers a version of Yahoo! (YHOO Quote) on its phones, and Microsoft (MSFT Quote), Qualcomm (QCOM Quote), America Online (AOL Quote) and Bell South (BLS Quote) have struck deals to be a part of the action.

Investors have taken notice, too. Over the past year, the sector has seen some big gains with Nokia (NOK Quote), up nearly 200%, Nextel (NXTL Quote), up more than 350%, and Qualcomm, up a whopping 1,470%, through Monday's close.

And the Thursday initial public offering of Palm, the wireless unit of 3Com (COMS Quote) that brought us the Palm Pilot, is this young year's most anticipated IPO.

If a sector or sub-sector performs well, you'll soon see funds that zero in on it. Investec Guinness Flight Wireless World rolled out on Monday. Another fund, aptly named Wireless, is slated for an early April launch.

No Brand Names Here

Both funds are no-load, but levy high expenses, according to their filings with the Securities and Exchange Commission. Also, neither is being offered from a name you know well.

Investec Guinness Flight has extensive asset management overseas, but operates just eight no-load funds in the U.S. Its two other sector funds are the passively managed; (GFWIX Quote)Wired Index and (GFINX Quote)internet.com Index. The manager of its new wireless fund doesn't have a track record running a U.S. retail fund, according to the fund's paperwork.

The other wireless fund is being offered by Value Trend, a fledgling fund shop in El Cajon, Calif., which manages two funds. Both have performed well and started only last year. (You may have heard of Value Trend's Links, a no-load fund focused on the golf industry, and yes, that fund owns wireless stocks because golfers use cell phones on the course.)

Other wireless-focused options are UITs, fixed portfolios of stocks that expire after a given amount of time, usually one, two or five years. At that point, investors can cash out or roll their investment in the next UIT in that series. (For more on UIT structure, see this Dear Dagen .)

You can find wireless UITs from several firms, including John Nuveen (JNC Quote), Nike Securities and Van Kampen Funds. These give you the clarity of knowing exactly what you own, but they have drawbacks.

First, it's not necessarily a good idea to commit to a fixed basket of stocks in such a dynamic industry in which companies can "come and go," says Chris Traulsen, a Morningstar analyst who covers several telecommunications funds. UITs also typically charge loads of 3% to 4%, spread over the life of the investment, which can make them pretty expensive if you hold your shares only for two years. Finally, UIT investors often get smacked with hefty capital gains when the trust expires and stocks are sold.

A similar, but somewhat cheaper, route is Merrill Lynch's (MER Quote) Telecom HOLDRs (TTH Quote), a fixed basket of 20 telecommunications stocks. Telecom HOLDRs, like Merrill's other industry-specific HOLDRs, trade like a stock on the American Stock Exchange. HOLDRs offer ownership in 20 stocks, with just one transaction and commission.

HOLDRs are cheap because they levy only a $2 quarterly fee per 100 shares, and if that isn't covered by dividends, it's waived. If you redeem in round, or 100-share, lots you can get the underlying stocks instead of cash for just $10 per 100 shares.

Problem is, buying Telecom HOLDRs isn't a pure wireless play. They hold many wireless stocks, like Sprint PCS and Nextel, but also other telecom companies with substantial nonwireless assets, such as AT&T (T Quote) and Bell Atlantic (BEL Quote). (See this Dear Dagen for more on Telecom HOLDRs.)

Check Your Portfolio First

Before you move on any of these options, you might want to look over the portfolios of funds you already own.

"Most funds, unless they're value funds, own wireless stocks. Most of the growth funds we track played the Sprints and Nokias last year," says Morningstar's Traulsen.

For instance, telecommunications equipment was the top sector at year-end in both (MFOCX Quote)Marsico Focus and (MGRIX Quote)Marsico Growth & Income and the top holding in both funds was Qualcomm. (TLFQX Quote)Firsthand Technology Leaders had a 12.5% bet on Qualcomm at year-end too.

Even utilities funds are investing in wireless. At year-end, (FSTUX Quote)Invesco Utilities owned shares of Mannesman, Qwest Communications (Q Quote) and Nextel.

And there probably are several small-cap wireless stocks in your funds whose names you don't recognize.

Marc Klee, co-manager of (NTTFX Quote)John Hancock Global Technology, likes some peripheral players, such as Portal Software (PRSF Quote), which handles billing for wireless Net access. So far this year, the stock is up nearly 48% through Monday's close, and Klee's fund is up 19.2%.

Those are the kinds of lower-profile plays that highlight the advantage of using an actively managed mutual fund, in which a pro can react as opportunities change.

If you really want a wireless-focused fund, you should track Wireless World and Wireless out of the gate to see which is the better option, says Traulsen. Of course, if you wait a while, you could have a much bigger menu of wireless funds to choose from.

Industry insiders doubt the sector is big enough to warrant many funds. But people said the same when four Net funds were launched in 1996. Now there are more than twice that number, with many more in the works.