In its policy statement following the end of two-day meeting on July 27, the Fed kept the key rates unchanged as expected, but hinted at a rate hike this year. However, all economic data need to be uniformly strong. But with inflation remaining below the desired target, a rate hike may not be all too imminent. Moreover, it is expected that with the Presidential election in November, the markets may remain volatile. Given these uncertainties, the Fed is expected to adopt a cautious path, which might delay rate hike even further.
Since interest rates are at a low range of 0.25% to 0.5%, investing in telecom, which is significantly based on debt capital and is one of the key safe-haven sectors, might be a prudent option. This sector mainly constitutes companies that provide telephone, television, computer networks and wireless services, and produces new software to enhance the accessibility to telecommunication services.
A Look at FOMC Policy Statements
After the end of its two-day policy meeting on July 27, the Fed decided to keep its rates at the previous range of 0.25% to 0.5%. This came as no surprise as the Fed was fretting about a wide range of risks including a slowdown in U.S. economic growth in the first quarter, uncertainty about China's economic outlook and Britain's vote to leave the Eurozone.
In its policy statement, the Federal Open Market Committee (FOMC) said that the labor market has "strengthened" and economic activity has been growing at a "moderate rate." It added that household spending has increased strongly and that "near-term risks to the economic outlook" have weakened. This makes a hike in September look possible. However, the Fed did not give any clear idea on when it might consider increasing rates.
However, the Fed also said that inflation continues to lag its desired target range. Even though some may argue that the core Consumer Price Index went up 2.3%, the Fed's preferred inflation gauge - the Personal Consumption Expenditure Index - remained below its 2% target. The index recorded current inflation at 1.6%, which continues to hover below the target since 2012. For the Fed to hike rates, data needs to be consistently strong. But, in the current scenario, low inflation for a sustained period fails to fulfill such requirements.
Why Telecom Funds?
Lower interest rates mean a decrease in the cost of capital, a basic requirement for capital-intensive companies like those in the telecom space. This is mainly because they require a continuous inflow of funds to carry out their operations and upgrade infrastructure.
Also, companies in the telecom sector have the ability to generate stable returns for investors. Further, it is speculated that the U.S. telecommunications industry will witness reasonable growth throughout this year.
Moreover, last week was all about earnings in the telecom sector. National telecom carriers T-Mobile US Inc. (NASDAQ:TMUS) and Sprint Corp. (NYSE:S) along with Comcast Corp. (NASDAQ:CMCSA) reported strong financial results wherein both the top and the bottom line surpassed the respective Zacks Consensus Estimate.
Some telecom behemoths like Verizon Communications Inc. (NYSE:VZ) and AT&T Inc. (NYSE:T) posted mixed second-quarter 2016 results. Although Verizon's total revenue of $30,532 million missed the Zacks Consensus Estimate of $31,117 million, its adjusted earnings per share of 94 cents beat the Zacks Consensus Estimate by a penny. Also, AT&T reported adjusted earnings per share of 72 cents, in line with the Zacks Consensus Estimate. Even though total revenue of $40,520 million missed the Zacks Consensus Estimate of $40,661 million, it increased 22.7% year over year.
Buy These Four Telecom Mutual Funds
Given this encouraging backdrop, we have selected four telecom mutual funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy). Moreover, these funds have encouraging three-year and five-year annualized returns. They also have minimum initial investment within $5000 and low expense ratios.
We expect these funds to outperform their peers in the future. 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 performance, but also on the likely future success of the fund.
Fidelity Telecom and Utilities (MUTF:FIUIX) seeks returns through growth of capital and income. FIUIX generally invests in equity securities. The fund invests a major portion of its assets in securities of companies from both telecom and utilities sector. The fund has 3-year and 5-year returns of 11.3% and 12.4%, respectively, and an expense ratio of 0.74% as compared to the category average of 1.38%. FIUIX sports a Zacks Mutual Fund Rank #2.
T. Rowe Price Media & Telecommunications (MUTF:PRMTX) invests the lion's share of its assets in securities of technology, media and telecommunications companies. PRMTX seeks capital appreciation over the long run. The fund has 3-year and 5-year returns of 13.5% and 14.7%, respectively, and an expense ratio of 0.79% as compared to the category average of 1.43%. PRMTX sports a Zacks Mutual Fund Rank #1.
Columbia Seligman Communications and Information Z (MUTF:CCIZX) seeks to offer capital gain to its shareholders. CCIZX normally invests majority of its assets in the securities of the companies from the telecommunication, information technology and media industry. The fund has 3-year and 5-year returns of 18% and 13.4%, respectively, and an expense ratio of 1.10% as compared to the category average of 1.51%. CCIZX is a non-diversified fund and sports a Zacks Mutual Fund Rank #2.
Fidelity Advisor Telecommunications A (MUTF:FTUAX) invests more than 80% of its assets in securities of companies involved in manufacture and sale of communications equipments. FTUAX seeks capital growth and invests both in domestic and foreign companies. The fund has 3-year and 5-year returns of 10% and 11%, respectively, and an expense ratio of 1.15% as compared to the category average of 1.43%. FTUAX is a non-diversified fund and sports a Zacks Mutual Fund Rank #1.