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In Telecom, Invesco's Hayward Focuses on Infrastructure Ideas

March 14, 2000|PAUL J. LIM

Technology stocks in general have been the market's stars over the last year, but some of the hottest tech names have been in the telecom sector--issues such as JDS Uniphase, Qualcomm and Nokia.

Indeed, telecom has been a strong story for much of the last decade. Among major stock mutual fund categories, telecom sector funds rank second only to tech funds in performance over the last 10 years.

And in the last five years, Brian Hayward's Invesco Telecommunications fund in Denver has been the best performer in the sector, with an average annualized five-year return of 54.9%, versus 38.8% for the average telecom fund.

We recently spoke to Hayward to get his views on the telecom sector's outlook, prospects for individual stocks and how he's investing the $2.7-billion fund. The following are excerpts from the interview:

* Hayward on what's driving the telecom sector: Well, there are three [themes] that we're emphasizing in the portfolio. We know they've been driving the market up for the past several years. We think it can continue for the next five to 10 years, at least.

One of them is deregulation, which happened with the Telecom Act in the U.S. [in 1996]. It happened with the European Economic Union. It's happening all over the world.

Another one is the explosion of data traffic, driven primarily by the Internet. And that play is focused primarily on the fact that the voice networks that were designed and deployed in this country and in other industrialized countries decades ago were designed for three-minute voice conversations.

Most people still access the Internet today online with a modem, and they're on in the U.S. for more than one hour a day [on average]. So you do the math: It was designed to handle three-minute voice conversations on circuit switch networks. But people are on that same network through the phone lines for over an hour. So that can't last. It's already jamming up the system.

Plus, the speed that is required to handle the kind of traffic that will be available once the network is fast enough--like video streaming, things like that--requires a whole new architecture. The new carriers are already doing it. The existing carriers, like AT&T [ticker symbol: T] and MCI WorldCom [WCOM] are rebuilding.

Then the third [theme] is the proliferation of wireless services. Even though voice is still growing, the next big step will be data. We're just scratching the surface right now in the U.S.

The largest [test case] market so far is in Japan. NTT Docomo is the first. Watching what's happening with them is why everybody is so excited about the future. Because their subscriber growth of people taking data services as well as voice is exceeding all expectations.

Eventually you'll be able to literally videotape something and send it real-time over a wireless network across the country. When that happens, it's going to require another significant infrastructure build.

* On how he invests for his major themes: For deregulation, the rule of thumb is [it's] good for CLECs, but not good for the incumbents. CLECs are competitive local exchange carriers. Those are companies like WinStar Communications [WCII], Nextlink [NXLK], McLeodUSA [MCLD], Allegiance Telecom [ALGX] in the U.S. The biggest and best example overseas would be Colt in the U.K.

We are overweighted in CLECs and underweighted in companies like the regional Bells and the national phone companies in Europe. They were the former monopolies. The regulatory bodies have said there will be competition. You must open your networks. If you have 100% market share and the government does something like that, there's only one place for your market share to go and that's lower.

For data, it's the equipment companies. We want to own the arms supplier in the arms race. You know, sell the bullets to the combatants. That's a safe thing to do. [Names like] Nortel Networks [NT] and Ciena [CIEN] . . . JDS Uniphase [JDSU] is still our No. 1 holding.

And there's another company that's in our top five by now called SDL [SDLI], which is a competitor to JDS. The demand for that segment of optical networking components is so strong, we have revenue visibility for those companies for at least two years. So until it looks like they're stumbling on the fundamentals--and we haven't seen that--even though I could not give you an argument that says they're still cheap, it's a mistake to sell.

* On the dawn of wireless data services in the U.S.: Sprint PCS [PCS] is already offering short messaging on the phones and that kind of thing. It's so small [as a market] it's not an issue. It could become an issue if companies really start pushing it and people start using it.

If [carriers] want to allocate the spectrum to data services, they're going to have to take it away from voice services until they get the capacity for both upgraded.

Either way, you want to own the companies that do the infrastructure.

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