Telecommunications Has a Nice Ring to It
Investors wanting to reach out and touch something with a nice profit ring should take a look at the global telecommunications industry.
As the information age arrives in more and more countries, companies that provide basic telephone service are turning out to be some of the best ways to invest in emerging markets.
In mature economies such as the United States, breakthrough voice and data transmission technologies offer the potential for rapid profit growth in the years ahead.
Just as ships were essential to faster communications in the 18th Century, railroads in the 19th and automobiles in the 20th, the telephone will be the key to the 21st Century, predicts Mario Gabelli of Gabelli Funds, a New York-based mutual fund group.
Several specialized global and utility portfolios are positioning themselves to take advantage of this trend.
Fund managers are essentially trying to capitalize on two movements. The first is the spread of basic telephone services in populous, developing nations such as China and Indonesia. The second is the rapid growth of cellular, computer networking, cable and related businesses in the more advanced economies.
“We believe the communications area around the world is going through major changes,” says Oscar Castro, co-manager of the new Montgomery Global Communications Fund in San Francisco. “The demand for basic services and new telecommunications technology is increasing rapidly.”
For investors, the industry offers a combination of competitive dividends on some stocks and the prospect of solid appreciation from others--although most fund managers say they focus on the latter aspect.
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As a diversification move, many of the funds have both foreign and U.S. holdings.
Global telecommunications companies have a combined capitalization of about $1.4 trillion, equivalent to the third-largest stock market in the world, says Castro. Consequently, it is misleading to think of the funds as a single industry sector subject to wide volatility.
“Telecommunications touches on so many different aspects of the economy that it actually provides pretty good diversification,” said Michael Mahoney, manager of the GT Global Telecommunications Fund. Among the areas he considers exciting for profit growth are video conferencing, cellular phones and interactive TV.
Another interesting development is the trend toward privatization of state-owned foreign telephone monopolies. “When governments get out of the phone business, there tends to be a quantum leap in productivity,” said Mike Gerding, manager of the Denver-based Founders Worldwide Fund, which has an 11% stake in global telecommunications.
A big reason for this efficiency boost, Gerding says, is that private companies can make staff cuts that government enterprises, for political reasons, cannot.
Among specialized funds concentrating in this field, GT Global Telecommunications--established in January, 1992--rates as the largest and oldest. It returned a modest 4.85% last year but then surged 15.6% in the first 25 weeks of 1993. The fund (800-824-1580; 4.75% maximum sales charge) now counts $695 million in assets.
No-load investors have an alternative in the new Montgomery Global Communications Fund (800-572-3863), which opened its doors June 1. So far, it has attracted $4 million in assets.
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Several mainstream utility funds also have modest stakes of approximately 10% or more in foreign telecommunications companies. The list here includes Invesco’s Financial Strategic Utilities Fund (800-525-8085; no-load), Flag Investors Telephone Income (800-767-3524; 4.5% maximum load), Global Utility (800-225-1852; 5.25% load) and Prudential Utility (800-225-1852).
With the exception of Global Utility, which hasn’t been evaluated, the other three funds in this group have received superior performance ratings from Morningstar Inc. of Chicago.
One closed-end fund with a focus in this area is the Emerging Markets Telecommunications Fund (212-832-2626), which trades on the New York Stock Exchange.
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Anyone interested in a global telecommunications investment should keep in mind that these are best viewed as longer-term commitments for reasonably risk-tolerant individuals. Because of the types of stocks held, the funds share certain similarities with small-company and global portfolios, both of which can be volatile.
But among the more specialized funds, it’s hard to think of many with better long-term potential than those in the global telecommunications area.
Mahoney sees the business in a philosophical light--as one of the industrial sectors most likely to benefit from the collapse of communism and police states. “Our rationale for starting the fund was that we saw more of a free flow of capital and information across borders,” he said. “Telecommunications is an obvious way to take advantage of that.”
