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Telecom Funds Roar Back to Life

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March 22, 2004 — After three years of sustaining heavy losses, telecommunications stocks roared back last year: The average telecom fund soared 61.9% for the 12-month period ended February 27, versus a 38.7% gain for the Standard & Poor’s 500-stock index. The strong returns in the were bolstered by the rebounding telecom equipment-making and wireless communications sectors.

As global economies expand and corporate capital spending rises, the telecom industry is enjoying some of the best fundamentals in three years since the halcyon days of the late 1990s. Reflecting this improving climate, Standard & Poor’s recently raised its asset-allocation recommendation for telecom services to `market weight’ from `underweight,’ and also upgraded AT&T Corp. (T) stock recommendation to a `buy’ from `hold.’

Within the sector, Standard & Poor’s has a positive investment outlook on the wireless telecommunications sub-industry over the next 12 months, despite some pricing pressures. However, Standard & Poor’s carries a neutral outlook on the wireline sub-industry, due to competition from other telecommunications and cable companies, and to wireless substitution.

The best performing telecom fund over the three- and five-year periods, the $712-million T Rowe Price Media & Telecommunications Fund (PRMTX), invests in an array of companies — both domestic and foreign — including those engaged in publishing, film, cable TV, and telephone and cellular services. For the three years through February 27, the portfolio returned 4.2% annualized, versus a 10.1% drop for the average telecom fund. For the five years, it gained 8.7%, on average, versus a 5.8% decline for the peer group.

Managed by Robert Gensler, T. Rowe Price Media & Telecommunications had 59.5% of its assets invested in media, and 37.4% in telecom services at the end of 2003. The ten largest holdings at that time represented 36.8% of the fund’s total assets, and included stocks of a variety of companies, such as Vodafone Group ADR (VOD), News Corp. Ltd. ADS (NWS), Clear Channel Commun (CCU) and eBay Inc. (EBAY).

Another top long-term performer, the $4.2-billion Seligman Communications & Information Fund/A (SLMCX), shed 0.5% annualized for the three-year period, and gained 2.6% for the five years. The portfolio soared 42.3% in 2003.

Managed by Paul H. Wick, this fund has some latitude in where it may invest. That can include stocks of companies engaged in all areas of the communications, information, and related industries. Indeed, as of year-end 2003, the fund had significant exposure to application software, semiconductors & semiconductor equipment, health-care equipment & supplies, and computers & peripherals.

Although the fund had over 120 positions at year-end 2003, it is top heavy. The ten largest holdings represented nearly half the fund’s assets.

–Palash R. Ghosh