Fund Companies Unleash Slew of Wireless-Sector Funds
With wireless-communications stocks all the rage, mutual fund companies are unleashing a torrent of telecom/wireless funds. But the question remains: Is there enough bandwidth to support so many funds in such a narrow pipeline?
Amid a stunning run-up for wireless stocks, such as
Qualcomm
, a 2,619% gainer last year, fund companies have nearly doubled the number of wireless- and telecom-focused funds over the past nine months.
The move, which includes mutual fund giants such as $653.1 billion
Fidelity and $149.1 billion
MFS, indicates the companies see big wireless-stock returns and a steady flow of investor dollars down the road. It also marks a divergence from the industry's response to the Internet-stock craze: This time major-fund shops, many of which hesitated to launch tech- or Internet-specific funds over the past four years, have decided not to remain on the sidelines as another tech phenomenon blooms.
Of course, bloom may be too tame a verb. In 1999, wireless stocks posted a 70% return and rocketed up 161% from Jan. 1 through the March 10
Nasdaq Composite Index peak, according to
Baseline
. Since then the group has fallen, leaving it down 15.7% for the year. Still, the pros see rosy global projections for cell-phone use, wireless-data transmission and wireless-Internet access as solid long-term growth opportunities, despite the subsector's still-lofty valuations. (
TSC
dedicated a recent
Sector Spotlight to the wireless industry.)
"Wireless is just going to be a multibillion-dollar industry. If you want to know what inning we're in, I'd say we're just suiting up," says Jeff Provence, co-manager of the Value Trend Wireless fund, which launched April 3. The fund is down 8.7% over the past 90 days, according to
Morningstar
TheStreet Recommends
.
And Provence is not the only one with that idea. Before September, there were 14 telecommunications funds, but, since then, 11 have either been launched or registered with regulators. All of these new funds will be investing in wireless stocks, and five will focus exclusively on the subsector, which includes cell-phone makers, semiconductor concerns and networkers under its umbrella.
"Clearly, wireless has legs for the long term in fund companies' opinion, that's for sure," says Burt Greenwald, a Philadelphia-based mutual fund consultant.
The previous record for telecom funds launched in any calendar year was three during 1993, according to Morningstar. In just six months this year, at least nine have been launched or filed, not including unit-investment trusts from shops like
John Nuveen
and
Van Kampen
that focus on wireless stocks.
Like the first Internet-fund providers, most of the first money managers focusing on wireless are small, niche companies that specialize in tech or theme investing, such as
Firsthand Funds
,
Investec Guinness Flight
and
Value Trend
. When Net funds started rolling out back in 1996, firms like
Kinetics
,
Monument Funds
and
Munder
were the only game in town for a couple of years, and they raked in billions of dollars.
But this time Boston behemoth
Fidelity
, which has vowed not to run a Net fund but offers several select funds that appear to carve up the Net sector, is determined not to sit on the sidelines. Fido has already filed its own
Select Wireless
fund for a September launch.
"
Fund companies want to be there before wireless stocks get hotter. If you launched a Net fund in the last year, clearly it was a 'me too' act, and you'd have a hard time getting investors' attention," says Syl Marquardt, research director at
John Hancock Funds
, which doesn't offer a telecom or wireless fund.
Fidelity's entrance essentially kills any lead time the early, small-fry shops wanted.
"What's with that? I wish they'd waited until we had $1 billion," says Jim Atkinson, Investec Guinness Flight director. His firm's $41 million
Wireless World
fund was the first wireless-focused open-end mutual fund when it launched on Feb. 28. The fund is down 4.6% over the past three months, according to Morningstar.
The pioneers see Fidelity's bold and uncharacteristic entrance as a positive, saying the heavyweight legitimizes the wireless area.
"Obviously, if there's a company like Fidelity coming out with a wireless fund, you know there's a solid-growth opportunity," says Provence at Value Trend, whose wireless fund has $25 million in assets.
But just because Fidelity and other marquee-fund companies have jumped into the sector doesn't mean wireless funds are a great idea for most investors. These funds are focusing on a thin band of stocks, setting them up for significant
volatility. Consider recent Net fund launches, such as
(JAMFX) - Get Jacob Internet Fund Inv Report
Jacob Internet, down 44.7% this year, that have found their focus painfully constrictive in a sagging market.
"The fund industry is trying to slice the bologna a little thinner to focus on a sexy part of telecom. But as you slice it thinner you raise risk," says consultant Greenwald. Even several diversified funds have been
burned by mercurial wireless plays such as Qualcomm this year.
He and others worry that wireless stocks' currently high valuations might leave little room for growth in the near-term. The average price-to-earnings multiple of wireless-communications stocks is 77.1, compared with 44.7 for the
S&P 500, according to Morningstar. Bellwether Qualcomm is down nearly 70% so far this year and still has a price-to-earnings multiple of 70.
"The
wireless stocks' business results are going to be strong now; whether the stocks can go up from their high multiples, I don't know," says Alan Loewenstein, co-manager of
(NTTFX)
John Hancock Technology. Wireless stocks have risen from a 20% to a 30% weighting in his fund over the past year.
Also, investors should consider whether they already have all the wireless exposure they need through growth funds they already own. At last month's
Morningstar Investment Conference
panels of
growth and
tech, managers said they're focusing on wireless stocks of one flavor or another.
And
Janus'
April 30 shareholder report showed a
big telecom- and wireless-stock bet in nearly all its portfolios. How big? Seven of the firm's 15 stock funds had
Nokia
as their top holding.
If you absolutely, positively, have to have a telecommunications fund, most observers suggest looking at a broader telecom fund with a track record of at least three years. For a few options, check out this
June 24 Big Screen, which focused on the telecom group.
