Chapter 9

TELECOM INVESTING STRATEGIES

This chapter covers various investing strategies specifically for a Telecom allocation, building on the knowledge presented in this book. The strategies include:

• Adding value at the sector level
• Adding value at the country or industry level
• Adding value at the security level

Although the strategies presented here are by no means comprehensive, they provide a good starting point to construct a portfolio that can increase your likelihood of outperforming a benchmark. They should also help spur some investment strategy ideas of your own. After all, using this framework to discover information few others have discovered yet is what investing is all about.

Also, these strategies may focus solely on Telecom, but they are meant to be used as part of an overarching strategy for a portfolio managed against a broader benchmark. Some investors may choose to manage a portfolio of only Telecom stocks (or any other single sector). But in our view, for individual investors, managing against a broader benchmark increases both risk management and outperformance opportunities.

STRATEGY 1: ADDING VALUE AT THE SECTOR LEVEL

Consistent with the top-down method, investors must first determine when it is appropriate to overweight or underweight the Telecom sector relative to a broader portfolio benchmark. Some major factors contributing to this decision, covered in depth in Chapter 4, are shown in Table 9.1. Each driver should be considered not on its own, but in combination with other relevant drivers and also larger macroeconomic conditions. Also, don’t take this table to mean overweight decisions can be driven by the mere number of positive drivers (and the same is true in reverse with underweight decisions). At any one time, there can be many more meaningful drivers than we have space to list here. And some drivers are more important than others. The most important macroeconomic drivers can swamp sector, industry, and sub-industry drivers.

Table 9.1 When to Overweight and Underweight the Telecom Sector

Implementing Sector Overweights and Underweights

After the decision is made to overweight or underweight the sector, it’s time to implement it. The first step is determining the sector weight relative to your benchmark. The relative bet size should be proportional to your conviction. Mild conviction should translate to a more modest bet against the benchmark. The stronger your conviction, the bigger your bet can be—within reason. A vital rule is to never make a bet so large that if you’re wrong, you inflict irreparable damage on your portfolio’s return versus the benchmark.

Next comes determining the actual investments. One method is completely mimicking the sector by buying all the sector’s stocks in direct proportion to your under- or overweight. Obviously, this can be time consuming and costly—particularly for individual investors working with relatively smaller pools of money—depending on the number of stocks. An easier and likely cheaper method of mimicking the sector composition is buying exchange traded funds (ETFs) or mutual funds. The following are some larger Telecom ETFs and their stock tickers (again, this list is by no means exhaustive):

• Dow Jones US Telecommunications Sector Index Fund (IYZ)
• S&P Global Telecommunications Sector Index Fund (IXP)
• Merrill Lynch Telecom HOLDRs (TTH)
• Merrill Lynch Wireless HOLDRs (WMH)
• Vanguard Telecommunication Services ETF (VOX)
• PowerShares Dynamic Telecommunications & Wireless Portfolio (PTE)
• SPDR S&P International Telecommunications Sector (IST)

STRATEGY 2: ADDING VALUE AT THE COUNTRY OR INDUSTRY LEVEL

A more advanced strategy is making country- and industry-level bets based on your top-down analysis. Each Telecom industry and region falls in and out of favor periodically—no one area outperforms consistently over the long term. Your job is to determine how pronounced the degree of leading or lagging will be, when it’s likeliest to happen, and whether it’s likely to be profitable enough to make a bet.

Chapters 5 and 6 should provide a structure for asking relevant questions to assist such decisions. For example, Chapter 5 outlines key variables for identifying trends in wireline and wireless firms, such as:

• What countries, regions, and industries have the best prospects based on penetration rates and disposable income?
• What will drive wireline and wireless performance? Voice, data, or both?
• What are the most popular services driving demand for wireline and wireless data consumption? Are they likely to continue?

After such questions are answered, they should be scrutinized by examining appropriate challenges and opportunities as exemplified in Chapter 6. Ultimately, your decision to overweight or underweight an industry relative to the benchmark should jibe with your high-level portfolio drivers. Note: Always remember past performance is no guarantee of future performance. No set of rules works for all time, and you should always analyze the entire situation before investing. The past is about understanding context and precedent for investing—it’s not a roadmap for the future.

STRATEGY 3: ADDING VALUE AT THE SECURITY LEVEL

A still more advanced strategy entails investing directly in individual firms. This strategy should be based on your sector, country, and industry opinions—and was covered in more depth in Chapter 8. Never forget, individual stock selection should be driven by higher level, top-down portfolio themes. For example, if you have a strong conviction the developed world is entering a period of robust overall growth, you know that is typically a period when Telecom stocks tend to underperform (though not always). And if Telecom overall underperforms, even the best stock picking in the world means your Telecom selections are likely to lag better-performing sector stocks on an absolute basis.

However, in a period when Telecom underperforms, if you pick stocks well, your overall sector allocation may perform as well or better than your sector benchmark—which can help your overall relative performance. And during periods when Telecom does perform better than the overall market, if you can add value at the security level, you can improve your portfolio performance both on an absolute and a relative basis.

In Table 9.2, we provide examples of strategies for top-down security selection—though there are countless others. Further, the stocks named are just a few of those that, as of this writing, are emblematic of the higher-level themes we’re trying to capture based on the hypothesis. As you become more familiar with specific Telecom firms and their industries, you can eventually develop your own strategies. Always be vigilant for firm-specific issues that could cause a stock to act differently from what you would expect in the context of your broader strategy.

Table 9.2 Examples of Top-Down Security Selection

Chapter Recap

We couldn’t possibly list every investment strategy out there for the Telecom sector. Different strategies will work best at different times. Some will become obsolete. New ones will be discovered. Whatever strategies you choose, always know you could be wrong! Decisions to significantly overweight or underweight an industry relative to the benchmark should be based on a multitude of factors, including an assessment of risk. The point of benchmarking is to properly diversify, so make sure you always have counterstrategies built into your portfolio.

• There are numerous ways to invest in the Telecom sector. These include investing in ETFs, index or mutual funds, or buying the stocks themselves.
• Investors can enhance returns by overweighting and underweighting industries or countries based on a variety of high-level drivers.
• An advanced strategy involves making bets on individual stocks based on specific themes.