From the October 2007 issue of Investment Advisor • Subscribe!

Don't Hang Up On Telecom

Telecom stocks have performed well this year, beating the broader market, amidst a climate of increasing turmoil and volatility, rising inflation, higher interest rates and credit woes.

Todd Rosenbluth, telecom analyst at S&P, currently has a "neutral" fundamental outlook for one of the most important sub-industries within telecom--integrated telecommunications services (wireline). Rosenbluth noted that the telecom landscape was significantly altered with the formation of the new AT&T Inc. (T), its subsequent acquisition of BellSouth in December 2006; and by the combination of Verizon Communications (VZ) and MCI in January 2006. He does not expect the wireline sub-industry's outperformance to continue, citing that some stocks are fully valued or overvalued.

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One of the best performing mutual funds in the telecom sector, the $2.06-billion T. Rowe Price Media & Telecom-munications Fund (PRMTX) invests in mid- or large-cap media, technology, and telecommunications stocks from around the world. Portfolio manager Henry Ellenbogen may choose from companies engaged in any facet of media and telecommunications, including publishing, movies, cable TV, telephone, cellular services, and technology and equipment.

As of June 30, 2007, the fund had about two-thirds of its assets invested in U.S. equities, with the remaining one-third in foreign companies. Familiar domestic names like Amazon.com (AMZN) and Google (GOOG) were among the fund's top ten holdings as of July 31, but the portfolio also included Bharti Airtel of India and Mexico's America Movil.

Broadly speaking, the portfolio is dominated by telecom services (47.8% of total assets) and media (39.8%).

A strong recent performer, the Wireless Fund (WIREX) is a more concentrated portfolio focused on communication services, communication equipment, software and programming, computer hardware, peripherals, storage devices, semiconductors, and data networking.

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