Emerging mobile media carries the promise of having a single, personalized device to replace the telephone, computer and TV. People will be able to receive e-mails, browse the Internet, get precise directions, read books and watch TV. Entertainment developers and telecom companies will be able to track individual preferences, and in turn, they will then be able to direct enhanced revenue-producing services and tools to subscribers.
This creates tremendous implications, especially in advertising and specialized software. A Bernstein Research report from June 2010 estimates that mobile bandwidth demand will expand by a factor of 45 over the next five years. This tremendous growth potentialhas attracted the attention of computer hardware companies and developers in the entertainment business.
For investors, the good news is that despite the vast potential, the industry is still developing. No leader has emerged in any one of the essential areas –Web distribution, content, transmission, infrastructure, hardware — and no single business model has developed either. That’s why some analysts have compared the wireless telecom industry to the early days of video recorders, complete with VHS-Betamax format war, which lasted about a decade beginning in 1975.
Here are four of the top-performing U.S. telecom funds, each with their own investment strategy and different returns over 1-, 5- and 10-year periods.
| Total Net Assets | 1 Yr. Return | 5 Yr. Return | 10 Yr. Return | ||
| T. Rowe Price Media/Tele | PRMTX | $1,830,200,000 | 25.80% | 11.61% | 10.68% |
| Vanguard Tele Index | VTCAX | $16,400,000 | 17.72% | 4.39% | N/A |
| Fidelity Select Wireless | FWRLX | $317,900,000 | 14.69% | 3.78% | (0.12%) |
| Rydex: Telecom | RYMIX | $11,900,000 | 13.02% | (0.46%) | (7.86%) |
T. Rowe Price Media-Telecommunications Fund (PRMTX)
Expense ratio: 0.9%
Manager: Daniel Martino (since 2007)
Top Holdings: Crown Castle International (NYSE:CCI), Amazon (NASDAQ:AMZN), Time Warner (NYSE:TWX), Google (NASDAQ:GOOG), Apple (NASDAQ:AAPL)
Considered a focused specialty fund, PRMTX differs from its peers by being underweight telecommunications and slightly overweight media, consumer and business services. Holdings are chosen based on how company components will benefit from new technology changes. It is also concentrated: its top 10 holdings comprise about 45% of the fund, as of December 2010. That may account for its outperformance, plus, it’s less exposed to telecomm hardware (equipment and wireless.) Despite the focused approach, the fund only carries an average risk rating from Morningstar.
While its stated mandate is to invest at least 80% of assets in the common stocks of media and telecommunications companies (in the large- to mid-capitalization range), the fund’s low weighting in the more volatile wireless and hardware names may restrain performance if one of those names becomes the next new thing. But so far, that underweight strategy has paid off, as evidenced by its consistent out-performance of other telecomm peer funds.
Vanguard Telecomm Index (VTCAX)
Expense ratio: 0.24%
Manager: Ryan Ludt (since 2004)
Top Holdings: Verizon (NYSE:VZ), AT&T (NYSE:T), American Tower (NYSE:AMT), Crown Castle (NYSE:CCI), Sprint Nextel (NSYE:S), Centurylink (NYSE:CTL), Quest (NYSE:Q)
As an index fund, VTCAX tracks the performance of the MSCI U.S. Investable Market Telecommunication Services 25/50 index, which is made up of stocks of U.S. companies of all size within the telecommunication services sector. Due to changes in the Internal Revenue Service’s diversification rules earlier this year, the fund cannot hold the largest companies in the index since it would create an overweight situation. As a result, the fund must underweight companies which have a large index weighting, such as AT&T and Verizon, and overweight smaller companies. This may prove a blessing, since the fund took a 38.9% hit in 2008 as its largest fund holdings succumbed in the recession. As you’d expect, VTCAX excels in controlling its expenses. It posts an expense of 0.24% versus the telecomm fund category average of 1.62%.
Fidelity Select Wireless (FWRLX)
Expense ratio: 0.96%
Manager: Gavin Baker (since 2007), Kyle Weaver (since 2009)
Top Holdings: Vodafone (NASDAQ:VOD), Qualcomm (NASDAQ:QCOM), Sprint, China United Network Communications (NYSE: CHU) Telefonica (NYSE:TEF)
This focused fund invests at least 80% of assets in securities of telecommunications companies engaged mostly in wireless communications services or products, including securities of foreign issuers. It is under-represented in media. The main question for investors is whether you want focused exposure to wireless companies or broader exposure to the other key components shaping broadband expansion in 2011 and beyond Given the very competitive media, content, and software sectors, investors should consider getting greater exposure for each dollar invested in a more diversified fund.
Rydex: Telecommunications (RYMIX)
Expense ratio: 1.39 %
Manager: Team managed
Top Holdings: AT&T, Cisco (NASDAQ:CSCO), Verizon (NYSE:VZ), Vodafone, Qualcomm, American Tower
This concentrated fund has 100% of assets in telecommunications and hardware, with its top 10 holdings comprising 52% of assets. Its investment policy states the fund invests in companies which develop, manufacture, sell or service communication equipment. The fund suffered losses in the 7% range for its 5- and 10-year performance, yet posted a 6% gain for the most recent one-year period. Its concentrated sector exposure and high expense ratio should make this a speculative exposure.
Opportunities Abroad
While the U.S. telecom industry continues to add more sophisticated features to its wireless 3G retail products, China, India and Australia are investing in telecom as part of their infrastructure expenditures.
Australia is building “the world’s most ambitious broadband project,” costing about $40 billion, according to Prime Minister Julia Gillard. The private sector-government project will consist of a fiber optic system linking 1,000 cities and towns to eventually include 93% of the country’s homes and businesses. The remaining 7% will be covered by satellite advanced wireless systems to create system delivery broadband-assisted health care, as well as other business and consumer services.
This is considered important as Australia seeks to provide service to its frontier states, Queensland and Western Australia. While these states only hold one-third of the nation’s population, they are booming as a result of natural resource export activities to China, Indian and other south Asia economies.
India and China are both pushing ahead quickly by expanding their national mobile phone systems. Eventually, these will expand into Internet service offerings. Both China and India are the natural beneficiaries of what analysts call “scale” — the economic benefit generated by the sheer number of subscribers, ad inventory and traffic data. In turn, this drives more revenue at lower cost.
India plans to launch a new 3G system in early 2011 opening faster access to millions.
China is in the process of expanding from a 2G to a 3G network. One telecomm infrastructure play to consider in China is AsiaInfo-Linkage (NASDAQ:ASIA), a provider of telecommunications software solutions and IT security products and services. ASIA’s largest customers are China’s major telecom carriers — China Mobile, China Unicom and China Telecom — which could prove useful as the expansion into 4G continues. Another play worth investigating is Telestone (NASDAQ:TSTC), which has 95% of its customers from the three largest Chinese mobile operators — China Mobile (NYSE:CHL), China Telecom (NYSE:CHA), and China Unicom.
Chuck Epstein does not hold positions in any stock or fund cited in this article.
