Invest Like A Billionaire: Telecoms Calling

photo: JonJon2k8

The world’s richest man today, contrary to what you may expect, is not Bill Gates or Warren Buffet. His name is Carlos Slim Helu: a Mexican whose rise to the top was propelled by the fast-growing telecommunications industry.

Slim, who owns Latin America’s biggest mobile phone company, America Movil, is now worth $53.5 billion. He got in the telco game during the privatization of Mexico’s national telephone company in the 1990s. Recently, he merged his fixed-line assets – landline operators Telmex and Telmex Internacional — with his mobile company, creating a regional powerhouse that, according to mobile industry data provider Wireless Intelligence, has around 220 million customers.

Why are we telling you all this? Obviously, raking in billions by way of owning a telecommunications company (or three) is not in everyone’s future.  But individual investors could still benefit from the industry’s growth by purchasing shares of telecom companies, mutual funds or ETFs.

Covering the world

The telecommunications industry, particularly wireless service providers and vendors focused on these markets, is registering double-digit growth in many regions. Mobile services, which now grow much faster than stagnant landline services, reached 40% worldwide penetration by the end of 2007. As cell and smart phones become a readily-available commodity in even the most remote corners of the world, the wireless industry’s penetration is certainly continuing to rise.

The developing world is the fastest-growing region for telecommunications services, according to the International Telecommunication Union, the leading United Nations agency for information and communication technology issues. Established European companies like Vodafone and Deutsche Telecom are looking to emerging markets for growth. In Asia, two of China’s most successful companies – networking and telecommunications equipment providers ZTE and Huawei Technologies — have benefitted from a strong home market and growing success in international markets, where they compete with household-name companies like Ericsson and Nokia Siemens Networks.

“We do see a shift towards Asian players, which have advantages from lower costs to highly educated engineers,” says Stépan Breedveld, an Amsterdam-based senior partner of The Boston Consulting Group who serves as global head of the consultancy’s Telecommunications practice.

But the region experiencing highest growth these days, according to ITU, is Africa.  At just 28%, its mobile penetration rate leaves ample opportunity for greater advances. (Compare that to Europe, where mobile penetration is estimated at 111%.)

With economies recovering, companies will sooner or later regain the confidence and money to spend on infrastructure upgrades. Digitization and mobile data are driving such investments. According to a report by consultancy Deloitte, as the technology and media sectors rush to embrace all things digital, the global telecom industry will be a key player. The problem is, there is a “traffic jam” in broadband. All the players — from equipment makers and carriers to consumers and regulators — will need to come up with creative solutions to “widen the bottleneck.”

The growing importance of mobile search for smartphones, the success of VoIP on mobile devices, changes in network technologies and pricing plans to cope with the explosion of data, and the sector’s focus on reducing its environmental impact are among the other key industry issues for 2010.

Where to invest

Investors can find opportunities in both traditional telecom stocks that were once landline-focused — such as AT&T and Verizon — as well as newer wireless companies and infrastructure companies such as American Tower.

“The sector is still relatively cheap,” said Sergey Dluzhevskiy, co-manager of GAMCo Global Telecommunications Fund, for an article on telecom funds published by Fidelity. “Dividend yields are high, earning multiples are still relatively low, and we see lots of values in both the traditional and wireless sectors.”

Though AT&T & Verizon in particular have high dividend yields, growth is tough in the mature U.S. market. The action is in emerging markets. That is where a player like Vimpelcom looks attractive.

Vimpelcom, if you haven’t heard, is Russia’s second largest telecom operator, which is now in the process of acquiring Ukraine’s largest mobile provider, Kyivstar. The deal has been in the making since last year, when the Russian billionaires behind Alfa group – Mikhail Fridman, German Khan and Alexei Kuzmichev – paved the way to merge the two companies. The new Vimpelcom Ltd. will have almost 85 million mobile clients (versus 63 million previously). It will trade on the New York Stock Exchange.

To be sure, investing in individual companies is tricky unless you have a sizeable portfolio that can be diversified among stocks in a good variety of different sectors.  Investors with more modest portfolios may look into sector funds like GAMCO Global Telecomm; Fidelity’s Select Communications Equipment Portfolio, Wireless Fund, and Rydex Telecommunications Inv.

Keep in mind, sector funds are more volatile than more broadly diversified stock mutual funds, which means that you can expect higher swings in value, whether up or down, than your typical equity index fund that tracks the S&P 500 or Wilshire 5000.  Investors should also note that telecom services account for 2.7% of the S&P 500 index based on market cap. In other words, if you own an S&P 500 index fund or ETF, you already have a stake in the sector.

However, if you are looking outside the U.S. where there is greater growth, a higher exposure may be worth considering, says telecom analyst Tibor Bokor of Russia’s OTKRITIE Investment Bank. Bokor recommends allocating as much as 10% of your portfolio to the sector.

As always, be sure to consult with your financial planner or adviser (if you have one) before making any radical portfolio moves.

Tatiana Serafin, a former staff writer at Forbes, now heads Global Markets and Ideas.