Telecom Funds Offer Internet-Like Returns but With a Track Record

Most have been around five years or more -- since the dark ages of the Internet.
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I still feel individual stock investing is a little too risky but I also want the ride of tech stocks, especially in the telecommunications sector. Can you recommend some telecom funds? -- Victor Zeng

Victor,

With many Internet funds still in diapers, a seasoned telecom fund can be a better way to invest in technology and the Internet.

These funds are investing in companies that are playing a direct role in the rapid expansion and enhancement of the Internet -- from traditional phone companies and wireless-services providers to telecom-equipment manufacturers.

The Internet infrastructure is, after all, basically the same as the telephone infrastructure. "Ultimately, the technology will get to the point that we'll be able to send video over the twisted copper wire," says Scott Lewis, co-manager of the

(WPGTX) - Get Report

Warburg Pincus Global Telecom fund.

In telecom funds, investors may have an easier time finding a fund with a track record and an experienced manager. Of 15 so-called communications funds tracked by

Morningstar

, 11 were sporting five-year records at the end of January.

As a group, these funds have produced a five-year average annual return of 34.7%, more than eight percentage points ahead of the

S&P 500

.

Granted, several of these older funds have lost their portfolio managers lately. Brian Stansky, for example, recently left the

(PRMTX) - Get Report

T. Rowe Price Media & Telecom fund to run a hedge fund, and his replacement has been managing the fund for about a month.

Andrew Kaplan, who managed

(FSDCX) - Get Report

Fidelity Select Developing Communications, also

left for a hedge fund.

However, you can find several strong funds that have long-term managers.

The $2.7 billion

(ISWCX)

Invesco Telecommunications fund, which has a five-year average annual return of 46.6% through January, has been managed by Brian Hayward since mid-1997.

Marc Gabelli is still managing

(GABTX) - Get Report

Gabelli Global Telecommunications and has been since its late 1993 inception. The fund's five-year annualized return is 32.2%. He also runs the

(GICPX) - Get Report

Gabelli Global Growth fund, which is categorized as a communications fund for its focus on telecom, cable, broadcasting and publishing.

Oscar Castro has been running the

(MNGCX)

Montgomery Global Communications fund since June 1993. The fund, which has about 65% of its assets overseas, has produced a five-year annualized return of 37.6%.

Uncovering a manager's length of service is easy. You'll have a harder time distinguishing one fund's approach from another.

Telecom can be defined very broadly. "Obviously, the lines are blurry in a lot of cases," says Warburg Pincus' Lewis. "

America Online

(AOL)

taking over

Time Warner

(TWX)

is a bellwether signal that telecom is a lot of things simultaneously. Cable companies are getting into the phone business. Phone companies are getting into video products."

The telecom industry can, however, be broken down into a handful of sub-sectors: incumbents, competitive entrants, wireless and telecom equipment.

Incumbents include traditional phone companies like

AT&T

(T) - Get Report

and Baby Bells like

Bell Atlantic

(BEL)

.

Competitive entrants include phone company-wannabes like

Time Warner Telecom

(TWTC)

that have stepped in to compete with the incumbents.

Wireless services consist of names like

Sprint PCS

(PCS)

.

Lastly, telecom equipment includes anything from cell-phone makers like

Nokia

(NOK) - Get Report

to chip-makers like

Texas Instruments

(TXN) - Get Report

and

PMC-Sierra

(PMCS)

.

Even more broadly, communications can also include media companies like

Walt Disney

(DIS) - Get Report

, satellite companies, radio stocks or even utilities.

Wireless and telecom equipment are two of the hottest areas of the business. For example, wireless penetration in the U.S. is still appalling low, about 30% compared to around 70% in Finland, says Montgomery's Castro. Plus, wireless data-transmission -- wireless Internet access -- is seen as a burgeoning area. All the new communications networks also need equipment.

The most aggressive telecom funds will certainly have heavy exposure to both areas.

And to find these funds, you only have to look at their returns from the past year or two.

The most aggressive funds have been the most successful, says Morningstar analyst Christopher Traulsen. You'll find these funds focusing on expensive, high-growth areas like Internet-related wireless communications and telecom equipment.

Invesco Telecommunications is among the most aggressive. The fund's largest holdings at the end of January were fiber-optic equipment maker

JDS Uniphase

(JDSU)

and

Cisco

(CSCO) - Get Report

, two names typically associated with the expansion of the Internet and its capacity. The fund's one-year return is an astonishing 189%.

The Warburg Pincus fund is equally stunning with its with a one-year return of 179%. But this portfolio invests a large percentage of its assets overseas, including 20% in emerging markets. The fund has about 20% each in incumbents, competitive entrants, wireless and equipment. At the end of January, top holdings included

Nextlink Communications

(NXLK)

, a competitive provider of local and long-distance service, and

Texas Instruments

(TXN) - Get Report

. (This fund's management team is rather new. Lewis joined the fund in the middle of last year, and co-manager Vincent McBride started last month.)

Castro's Motgomery Global Communications fund has about 9% of its assets in U.S. wireless stocks, including Sprint PCS.

If you want more juice than that, you might consider an even more targeted fund.

Pure wireless funds are just starting to appear.

Investec Guinness Flight

launched its

Wireless World

fund a couple of weeks ago, and

Value Trend

, a young fund firm in El Cajon, Calif., soon will launch the

Wireless

fund.

You will surely see more wireless funds if the area continues to sizzle.

Send your questions and comments to

deardagen@thestreet.com, and please include your full name.

Dear Dagen aims to provide general fund information. Under no circumstances does the information in this column represent a recommendation to buy or sell funds or other securities.