3 Telecom Funds to Buy as US Telecom Industry Evolves - Best of Funds

The telecommunications industry is identified as a major driver of global economic recovery. Unprecedented growth in high-speed mobile Internet traffic, chiefly for wireless data and video, has transformed the industry into the most evolving, inventive and keenly contested space. In addition, the emergence of wireless broadband technology has created several new service areas, which offer significant growth potential.

According to a report by Infonetics Research, telecom operators globally generated approximately $2 trillion in revenues in 2013. This is a slight improvement from $1.9 trillion revenues recorded in 2012. Notably, the report also stated that telecom carriers are increasingly spending on network upgrades with the latest technologies. In 2013, carriers' expenditures rose 6% year over year and are expected to rise at a CAGR of 2% from 2013 to 2019, most likely to reach a significant $367 billion.

Currently, the U.S. Telecommunications industry is evolving around 5 broad factors. These include wireless gradually becoming the future of the telecom industry and the consequent popularity of spectrum. High-speed fiber-based network is projected to expand more aggressively, especially for video/TV offerings.

In addition, consolidation within the industry will continue mainly due to shortage of airwaves and attainment of economies of scale. Innovative product launches are expected in areas of m-Commerce, virtualization and cloud-based technology, high-speed metro Ethernet, to name a few. Apart from these, there still remains ample scope for expansion in the U.S.  According to the Federal Communications Commission (FCC), nearly a fifth of rural American households lack broadband access.

Despite the massive growth in fiber-to-the-home networks, we believe that wireless networks will boost growth in the telecom industry. The GSM Association's research wing, GMSA Intelligence, recently revealed its estimation of more than 1 billion global LTE connections by 2017. Currently, approximately 274 LTE networks are commercially available in 101 countries. More than 350 LTE networks will be commercially functional by the end of 2014. By 2017, the number is likely to reach nearly 465 LTE networks across 128 countries. At present, there are approximately 200.1 million LTE subscribers globally.

GSMA Intelligence further reported that LTE users consume an average of 1.5GB data per month, twofold of what is consumed by non-LTE users. In the developing countries, LTE users can generate 20 times higher average revenue per user (ARPU) to carriers than non-LTE users, whereas in the developed countries, ARPU can be 10-40% higher for LTE users than non-LTE users. Apart from the terrestrial wireless network, the U.S. has an advanced satellite broadband network, mobile satellite radio systems and extensive WiFi networks.

The telecom infrastructure developer's market is witnessing a technical change globally. So far the main thrust of the communications service providers was on developing advanced hardware, which would enable them to attain enhanced speed, scalability and reliability. However, recent developments suggest that operators are gradually shifting focus from a hardware centric growth model to an IT/software centric business model. The primary reason behind this shift is the significant growth of cloud-based virtual networking.

Growth of software-defined networking (SDN) and network function virtualization (NFV) encouraged newly emerging digital media companies to invest heavily in the communications infrastructure market. SDN provides customers increased bandwidth utilization, higher reliability and reduced capital spending. NFV is designed to consolidate and deliver the networking components needed to support a fully virtualized infrastructure -- including virtual servers, storage and even other networks. It utilizes standard IT virtualization technologies.

The U.S. telecom industry is likely to witness more mergers and acquisitions in 2014. Owing to the rising demand for scarce and valuable wireless spectrum, mergers and acquisitions have increased exponentially. While established players need more spectrums to gain competitiveness, small players prefer to collaborate with strong rivals rather than trying to establish a nationwide foothold, which is extremely capital intensive.

Recently,

announced the largest acquisition proposal of the wireless industry. The company has decided to acquire the remaining 45% stake of Verizon Wireless Network from

. Verizon currently holds the majority 55% of this venture. In Feb 2014, Comcast reached an agreement with

to acquire the latter in an all-stock deal valued at around $45.3 billion.

Softbank of Japan acquired a 78% stake in

for $21.6 billion. Sprint is further eyeing

to acquire. Satellite TV operator

boasts has a lucrative portfolio of spectrums (an estimated value of $10 billion) and is looking for a suitable merger option to develop a nationwide wireless network.

Here, we will suggest 3 Zacks Mutual Fund Rank #1 (Strong Buy) or Zacks Mutual Fund Rank #2 (Buy)  telecom funds. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performances, but the likely future success of the fund. These funds also have provided healthy returns over the last one and three-year periods.

(PRMTX) seeks to provide long-term appreciation of capital by investing in media, technology, and telecommunications stocks. The fund usually invests in mid to large cap companies. The fund invests a lion's share of its assets in companies whose operations may include telephones, cellular services, and technology and equipment among others.

The fund carries a Zacks Mutual Fund Rank #2 (Buy). It has an expense ratio of 0.80% as compared to category average of 1.38%. The fund has returned 26.95% and 18.57% over the last one year and three-year period, respectively. Top holdings of the fund include Google Inc, Verizon Communications Inc. and American Tower Corp.

(PGBZX) invests in mid to large-cap companies across the world that are involved in the development and marketing of communications services or communications equipment. The fund invests in both growth and value stocks. The non-diversified fund may also be involved in short sales of securities.

The fund carries a Zacks Mutual Fund Rank #1 (Strong Buy). It has an expense ratio of 1.36% as compared to category average of 1.38%. The fund has returned 25.80% and 16.36% over the last one year and three-year period, respectively. Top holdings of the fund include Vodafone Group PLC, Verizon Communications Inc. and SOFTBANK Corp.

(FSTCX) seeks capital growth. It invests majority of its assets in companies that are primarily involved in developing and selling communications services or communications equipment. The fund employs fundamental analysis like company's financial health and industry ranking apart from considering market and economic factors for its investment decisions.

The fund carries a Zacks Mutual Fund Rank #2 (Buy). It has an expense ratio of 0.82% as compared to category average of 1.38%.

The fund has returned 12.61% and 10.10% over the last one year and three-year period, respectively. Top holdings of the fund include Verizon Communications Inc., AT&T Inc and T-Mobile US Inc.

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