Dollars For Dialing

Warburg's hot telecom fund hunts across the globe

Remember when investing in telecommunications meant buying just one boring stock in a heavily regulated industry--Ma Bell? Today, as phone deregulation spreads around the world, telecom stocks have become some of the hottest plays around. But which one? AT&T is still with us, of course, but is it a cable company or a phone provider? Do you want to invest in wired or wireless? Europe or Asia? To Scott Lewis and Vincent McBride, co-managers of the Warburg Pincus Global Telecommunications Fund, the answer is simple: Spread your bets around.

The duo's strategy has worked splendidly (table). Warburg Pincus Global Telecom returned nearly 157% in 1999 and has averaged 85% annually over the three years ending Mar. 17. Its three-year performance is nearly double that of other telecom funds, says Morningstar, and better than five times that of the Standard & Poor's 500-stock index. What's more, the fund is one of only five mutual funds to have returned more than 75% during the three-year period.

Lewis, 39, and McBride, 35, approach telecoms broadly to reduce the effect of the sector's volatility. "We don't mind avoiding the extremely high spikes if we can also avoid the downward swings," says Lewis. That means balancing their positions by region, market capitalization, and segments within the industry. As a result, none of the fund's 120 stocks can lay claim to more 3% of its assets.

The duo also eschews overpriced takeover stocks. February's $180 billion takeover of Germany's Mannesmann by Britain's Vodafone AirTouch opened the gates to merger activity throughout Europe. But Lewis is avoiding the stocks of recently privatized European national phone monopolies because "investors have bid [them] up to incredible proportions." The fund also shuns the Baby Bells, even though on average they trade at an estimated price-earnings ratio of 20 for this year--a quarter that of Deutsche Telekom. "We're worried about how much growth they have left," says McBride.

FOOTHOLD. Instead, McBride and Lewis are buying emerging U.S. phone providers called competitive local exchange carriers (CLECs), arguing that European telecoms shopping in the U.S. will see more value in CLECs than in the Baby Bells. The fund favors well-capitalized CLECs with established track records: McLeod USA, NextLink Communications, and Time Warner Telecom, a spin-off from the media giant.

The fund is also into emerging markets, such as Brazil and South Korea. In Brazil, the state-owned Telebras monopoly was split into 11 companies in 1998. The privatized "Baby Bras" have until 2002 to establish a foothold, and then they'll be allowed to seek merger deals. After 2002, "someone is going to come in and join together what was broken. We just don't know who," says McBride. "We want to own those stocks now, rather than wait to buy after a runup later." So the fund has bought stakes in data and long-distance provider Embratel, umbrella stock Telebras, and wireless provider Tele Centro Oeste.

South Korea's competitive market earns even higher marks from the partners. "Demand for phone time is massive," says McBride. Their largest Korean holding is SK Telecom, the country's biggest cellular-service supplier, whose revenues have been rising 50% annually over the past five years. But their favorite Korean play is Samsung Electronics, the world's largest maker of DRAM chips for computers--and its third-largest handset maker. "By next year, cellular handsets could make up 40% of their sales," McBride says. Yet Samsung's p-e of 10 is only a fifth of Nokia and Ericsson, the No. 1 and No. 2 handset makers--which the fund also owns. In the hot telecom scene, this fund has been ringing all the right numbers.