From the March 2009 issue of Investment Advisor • Subscribe!

Mutual Fund Sector Focus: Ringing Up Profits? Telecom Mutual Funds

The reluctance on the part of the new Commander in Chief to part with his preferred mobile communications device, despite the interests of greater national security, has generated much hand-wringing in the media, but it also serves to highlight how important those tiny glowing boxes have become for everyone.

Like their new President, most Americans are addicted to staying in touch. The average consumer will likely keep spending on mobile communication and Internet services during more austere times ahead even as they cut back on other areas, according to Standard & Poor's equity analysts. As a result, telecom services is one of just three sectors for which S&P has a positive fundamental outlook and an "overweight" recommendation. (Energy and health care are the others.)

"Although we expect telcos to face challenges as the economy slows, we think their voice and broadband phone services have become staples for consumers," says Todd Rosenbluth, an S&P equity analyst. S&P Equity Research's outlook for wireless telecom is neutral due to intense competition in developed countries, while telecom equipment providers face a negative outlook as carriers cut back their spending in all areas.

Rosenbluth also notes the attractive dividend yields on many telecom stocks, making them attractive to income-oriented investors.

Many Domestic; Some International

Fewer than 20 mutual funds focus on the telecommunications sector. (See table below.) Many have the same top three holdings: AT&T, Verizon, and Qwest. But some invest more of their assets in international telecom companies. One example is DWS Communications, with the majority of its assets in Deutsche Telekom, Vodafone, and Telefonica.

Fidelity Advisor Communications Equipment and Fidelity Select Communications Equipment also exercise a different strategy: investing not in the service providers themselves, but in the equipment companies that run behind the scenes making the phones work. The Fidelity funds' top holdings include Qualcomm and Cisco.

The Seligman fund, which identifies itself as not only telecom but also communications, implements this broader mandate with a diversified list of top holdings, including Synopsys, Amdocs, and Check Point Software.--Vaughan Scully

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