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) - Get Report

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.

Judging from your portfolio, it seems as if you are a fan of wireless as opposed to wireline telecom companies. What's your reasoning there?

Wireless is growing much faster than fixed-line, no question about that. The growth rates for wireless are about 5 points higher. And the valuations are about the same, which makes it a simple choice for me. I prefer things that are growing, but I also care a lot about valuation. Wireless has it both ways.

Wireless companies rarely pay dividends, though, whereas wireline companies typically do. In this dividend-happy environment, does that make a difference in your thinking?

That's not completely true.

Vodafone

(VOD) - Get Report

is one of our larger holdings, and they pay a nice dividend.

America Movil

(AMX) - Get Report

is a Latin American wireless provider that also pays a small dividend -- maybe not as much as a wireline player, but still they do pay back something to shareholders. Furthermore, they have bought back a lot of their stock this year, which is another way to reward shareholders. It's a less predictable way to do it, but you need to give them credit for it.

You spread your bets around across a number of countries, to say the least. Which regions look strongest to you?

I don't try and pick countries

per se

. I try to pick situations. In telecom it's important to be aware of regulations as well as the local competitive landscape across different regions. The trends are the same everywhere -- that is, we are going from fixed to mobile. And in media the trend is digital migration. We are seeing those same trends all over the world. The difference is really in the regulations and the structure of local industries.

The regulations, valuations and overall opportunities were far more compelling outside the U.S. 18 to 24 months ago. But the funny thing that has happened over the last year or so is that regulations in the U.S. have drastically improved, and the structure of the industry has improved through consolidation. The valuations still might be a little cheaper overseas, which is why we still are not totally swapping out of our foreign positions into domestic names.

What about the declining dollar? How is that affecting your stock selections abroad?

When I do a bottom-up analysis and find a good name in Europe, I put it through an extra filter now, a currency filter. And it's the first time in a long time I have had to do this. I am not trying to play the currency market, but the euro has already had a spectacular run-up against the dollar, which may make U.S. companies more attractive. It's less of a problem since many Asian currencies are pegged to the dollar.

There has been a great deal of action in the media sector this year with Howard Stern's secession from Viacom (VIA) - Get Report to Sirius Satellite (SIRI) - Get Report, Liberty Media's (L) - Get Report stake in News Corp. (NWS) - Get Report, and even the Ovitz trial over at Disney (DIS) - Get Report. But where is the group headed?

In media there is always a lot going on -- that might be a permanent condition. The biggest change now is with regard to the role of technology. Technology was a friend to the media industry for many years by enabling companies to extend their reach. Satellite, DVDs and the Internet were new forms of distribution for media companies.

But now many of the new media companies are rising up to challenge the older, established companies. Howard Stern's move to satellite radio is a good example. He's not going alone -- Mel Karmazin is also making the jump from traditional media to satellite.

Speaking of technology companies, why do you have eBay (EBAY) - Get Report in your portfolio? Is that a media company?

We have an admittedly loose definition for media. For example, we won't own online brokers like

E*Trade

(ET) - Get Report

or

Ameritrade

(AMTD) - Get Report

. And you could easily say that eBay is a retailer. But they have some media company qualities about it if you stretch the definition far enough. You go to advertising-sponsored Web sites like

Yahoo!

(YHOO)

, eBay and even

Google

(GOOG) - Get Report

in lieu of watching TV or listening to the radio. But I will admit to you it is a gray area.

Another gray area seems to be gaming stocks. International Game Technology (IGT) - Get Report is your second-largest holding, plus you have a decent-sized stake in Multimedia Games (MGAM) . Is watching the video poker screen the same as watching a TV screen?

We lump together media and entertainment in a few instances, that's true. But we won't own a hotel company like

Mandalay Resorts

(MBG)

, which we view as outside our mandate. And IGT may be a slot machine manufacturer, but they are also in the content creation and entertainment businesses, just like your traditional media companies.

We have a widely defined charter to pick stocks and we prefer it that way. We would rather keep our options open than be boxed into owning a stock we did not like simply because it was in our space.

Let's go back to traditional TV for a second. What are the networks going to do postelection to keep the ad dollars rolling in?

It's a real question mark. It's tough to know what's going to happen to traditional television in 2005. On top of those worries, the Internet is making serious inroads into corporate advertising budgets at the expense of the television industry. Paid Internet search is growing much faster than traditional media purchases. The answer to your question may be that traditional media will have only moderate growth.

Where do you see the U.S. economy going in 2005 and how do you trace it back to your fund?

We are in a growth phase, even if it is slower growth. I'm not looking for the 20% grower even though we have some of those in our dynamic Internet names. Earnings are going to be growing at 10% to 12% a year, and that's still pretty good to me.

After the bubble burst, a lot of companies that we follow cleaned up their balance sheets and really improved their cash flow positions. The real question for next year is what they do with all that cash. Hopefully they return it to the shareholders instead of going on acquisition sprees.