A HIGH FIBER OPTICS PORTFOLIO DIET: DIAL ‘R’ FOR RETURNS AS TELECOM FUNDS HEAD FOR ANOTHER GREAT YEAR

If you haven’t already noticed, telecommunications funds are ringing up some mighty impressive numbers in 1999.

Year-to-date, the top three telecom funds, $406 million Invesco Worldwide Communications, $193.2 million TCW/DW Telecom Trust and $6.8 million Warburg Pincus Global Telecom, have pulled in returns of 45.4%, 39.18% and 30.42%, respectively.

On average, the sector’s funds are returning 26.6%, according to Lipper Inc. That’s 2.2 percentage points higher than the average science and technology fund, and a whopping 15.1 points higher than the average fund tracking Standard & Poor’s 500 stock index. More astounding: over the past year, they are returning an eye-popping 87.4%.

Telecommunications funds don’t often appear on the radar screens of investors because they’re a fairly new trend, explains Jeff McConnell, an analyst at fund tracker Morningstar Inc. “People still tend to think first of science and technology funds to fill the aggressive portion of their portfolios,” he says.

The success of these funds, which total 19, is hardly an overnight phenomenon. Their five-year annualized return is a solid 23.3%, which trails broader technology funds by 4.5 percentage points and S&P 500 index funds by 3.2 points. Over 10 years, telecom funds returned 21.5% to tech funds’ 25.2% and S&P 500 funds’ 18.8%.

waiting for big bang

Looking forward, the telecommunications sector – companies that deliver voice, video and data via a variety of wireless and wireline methods – should enjoy more explosive growth, say observers. Forrester Research of Cambridge, Mass., for instance, projects that telecom services, now a $726 billion market, will grow to $1 trillion by 2001.

Telecom fund managers are readying themselves for the surge. Peter Saperstone, manager of the $824.5 million Fidelity Select Telecommunications Portfolio, has loaded up on companies developing “next generation” telecom gear – the stuff that will enable corporate systems to handle millions instead of thousands of users and allow Internet surfers to transmit bulky data, like video and voice transmissions, more quickly and reliably.

His strategy is already paying off. He has steered the fund to a respectable 19.7% return so far this year and 29.8% since last April, ranking it 11th among its peers; over five years, the fund’s average annual return is 31.6%.

MCI WorldCom Inc., the nation’s second-largest long-distance carrier, and Cisco Systems Inc., which makes routers and switches – often referred to as the Internet’s plumbing – are among his biggest holdings.

Bruce Behrens, manager of the $1.3 billion Flag Investors Communications Fund – the top-performing telecom fund over one, five, and 10 years, according to Lipper, with a return so far this year of 24.5% – has also made a bet on MCI and Lucent, a telecommunications giant that competes head-on with Cisco.

“We missed Cisco,” he laments.

But Mr. Behrens is more interested in the baby Bell companies that have been gaining speed since the Telecommunications Act of 1996 deregulated the industry.

His favorite: SBC Communications Inc., a Texas-based regional Bell monopoly that’s fast becoming a global powerhouse thanks to an aggressive acquisition spree. It’s awaiting Securities and Exchange Commission approval to purchase another regional Bell, Ameritech, for $62 billion.

three of top five

Meanwhile, Brian Hayworth, manager of 1999’s top-ranked telecom fund, Invesco Worldwide Communications, and owner of Cisco, MCI, Lucent and regional Bell carriers, holds three of his fund’s biggest five stakes in fiber-optic companies: Global Crossing Ltd., Metromedia Fiber Network Inc. and Qwest Communications International.

Global Crossings is known primarily for laying a fiber-optic cable under the Atlantic from the East Coast to Europe far more quickly and cheaply than AT&T.

Metromedia Fiber is laying fiber-optic cable in U.S. metropolitan areas, and Qwest is building out its own network of fiber-optic cables to extend across the country.

Mr. Hayworth, Mr. Behrens and Mr. Saperstone also have smaller stakes in wireless telecommunications companies, including Nokia and Ericcson.

All three say that while wireless data are still transmitted sluggishly compared with wireline, an abundance of devices and services to speed things up is on the horizon.