John Foxx
Telecommunications used to be a dull sector of the stock market. Investors collected a nice dividend and relied upon steady stock gains, while consumers maintained a landline phone and maybe a cable television service.
Dividends and share price gains are still part of the landscape, of course. But you can no longer call the sector dull.
With cell phones, smart phones and tablet computers now roaming the globe amid fierce competition among providers, the telecommunications sector has become front and centre of a profound technological development.
The Fidelity Global Telecommunications fund offers a one-stop option for Canadian investors who want exposure to it. According to Lipper Research, the fund has returned 21.3 per cent over the past 12 months and 3.8 per cent over the past five years, to the end of June.
As the name of the fund implies, it looks beyond the usual suspects in Canada and has turned its gaze to international operators.
Among its top ten holdings at the end of May: AT&T Inc. (United States), Vodafone Group PLC (UK), China Mobile Ltd. (Hong Kong), Deutsche Telekom AG (Germany), MTN Group Ltd. (South Africa) and Telefonica SA (Spain).
"Some sectors lend themselves extremely well to global themes," said Aditya Shivram, who manages the fund. "Global themes permeate through the telecom world."
Look at smart phones as an example. Mr. Shivram pointed out that U.S. and Canadian consumers took to these BlackBerries, iPhones and other models very quickly, with about 50 per cent of subscribers now using these devices.
In Europe, the penetration rate lags at about 30 per cent. And in Korea and Japan, it is even less - meaning that subscribers in these countries have some catching up to do.
"We know how this story plays out," he said. "The popularity of smart phones, especially with Android now being a very credible operating system, is significant. We're going to get to 60 to 80 (per cent) penetration within the next two to three years."
At the same time, the way these global themes play out in countries can be quite different due to local regulations and competitive environments, which can either inhibit or encourage the profitability of telecommunications firms.
But the advantage of a global fund is that it can pick and choose among the most attractive regions in the world, where the business environment is good for telecommunications companies.
The Fidelity fund is by no means confined to the smart phone theme, either, but really looks at three equally weighted themes.
Besides smart phones, it has also embraced the theme of mobile telecommunications operators in emerging markets, where growth is expected to be strong over the next three to five years.
The fund has a relatively heavy exposure to emerging markets, with an 11.5 per cent weighting, according to Lipper.
It has also bet big on infrastructure assets as a way to tap into the fact that households are devouring telecom bandwidth as they add things like iPads and gaming consoles.
"The number of concurrent devices that are going to consume bandwidth within the house is just exploding," Mr. Shivram said.
But is this a good time to invest?
Mr. Shivram points to a number of advantages in the sector. Price-to-earnings ratios are typically among the lowest in the stock market, suggesting a compelling valuation.
At the same time, telecom companies are fairly resilient to economic setbacks because consumers tend to hold onto their communications devices even when times are bad.
The strong dividends also help. Globally, telecom firms have an average yield of about 5 per cent, which is attractive at the best of times but especially compelling when interest rates are so low.
"If you step back and say that you're looking for a 10 to 12 per cent total return a year, then getting 5 per cent from a dividend means that you are not as reliant on re-ratings, earnings upgrades and earnings coming through as you would be if you were looking at a company that paid virtually no dividends," Mr. Shivram said.
While low valuations and big dividends can imply sluggish growth, the fund manager believes that you can find good opportunities in markets where the smart phone theme translates into profits and the expansion of tablet computer use is unfolding at a blistering pace.
"I think you're going to see decent growth, which is not reflected by the current valuations," he said.
David Berman