Media and telecommunications firms belong to a world that is moving at lightning speed, with rapid changes in consumer tastes and established players fending off the advances of upstarts. It is also rife with technology that is evolving so quickly that this year’s “new” thing is already old hat.

“Telecommunications and media are going through a revolutionary change — and I don’t use that term lightly,” says Henry Ellenbogen, lead manager of the $144-million TD Entertainment & Communications Fund and vice president at Baltimore-based T. Rowe Price & Associates Inc. “The huge amount of capital invested in the late 1990s in telecom and technology allowed the infrastructure to be laid. There were a lot of poor investments at the time, to be sure. But they fostered a climate of very rapid innovation 10 years later.”

Although the term “convergence” was ridiculed by critics a decade ago, Ellenbogen argues that it is a reality today. And that’s what the TD fund is trying to capture.

Convergence is a reality “in terms of bandwidth, mobility and enabling technology. It’s creating business models that are changing rapidly, but also allowing a lot of growth in countries that historically had been highly regulated,” says Ellenbogen, who has run the fund since April 2005 with Robert Bartolo, another T. Rowe vice president. “Video over the Internet is the headline story of 2006 — as we saw with Google Inc.’s acquisition of YouTube.com. There’s also the growth of voice-over-Internet protocol, which benefits companies such as [Internet communications company] Tencent Holdings in China.”

Indeed, 40% of the TD fund is invested outside the U.S., reflected in holdings such as Mexico’s America Movil SA and India’s Bharti Airtel Ltd. “There are certain areas in which we believe there are good returns and reasonable risk,” he adds.

Thus far, the managers have delivered on that pledge. For the 12 months ended Oct. 31, the TD fund returned 20.7%, vs the 4.3% return posted by the median science and technology fund. Over three years, the TD fund’s returns averaged 15.8%, versus -0.8% for the median fund. And over five years, it averaged 7.1%, versus -4.9% for the median fund. The TD fund has a five-star Morningstar rating.

Launched in November 1997, the fund was run previously by Robert Gensler, vice president at T. Rowe. Under Gensler’s mandate, Ellenbogen assisted as an analyst for almost five years; Bartolo assisted for three.

Modelled on the US$1.3-billion T. Rowe Price Media and Telecommunications Fund, TD’s Canadian version is concentrated in four areas: wireless telecommunications services (now 27% of assets); diversified telecommunications services (21.5%), media (21%) and information technology, mainly software and services (19%), as well as in smaller holdings in hotels and leisure services.

The TD fund has about 70 names, although it tends to focus on the top 20, which account for 66% of the portfolio. The managers also tend to let winners run and keep turnover at moderate levels; last year it was 75%. “Some people may think these [top holdings] are reasonably priced, but we think they will continue to compound wealth for our shareholders,” says Ellenbogen.

The managers obviously like Canadian telecom suppliers — they account for almost 11% of the fund. “Canada has a three-player mobile market with a favourable regulatory environment,” says Ellenbogen. “There are also only two national networks, which allow for very high cash-flow returns. As well, wireless penetration is much lower than in other industrialized countries, so there is a lot of room for growth.”

Because he is impressed with the management teams at Telus Corp. and Rogers Communications Inc. and their efficient allocation of capital, Ellenbogen counts them among his fund’s top 15 holdings.

The wireless services segment includes infrastructure plays ex-emplified by large holdings in American Tower Corp., Crown Castle International Corp. and SBA Communications Corp. These firms provide the communication towers that form some of the backbone of mobile networks. “You win no matter which service provider gets the penetration. And, as mobile data continues to grow, you can leverage the existing infrastructure,” he says. These players benefit from high barriers to entry and healthy cash-flow growth.

Ellenbogen is also enthusiastic about global media firms and broadband services. “Historically, the media industry was highly regulated and required local licences. It had high barriers to entry,” he says. “But the Internet is an open system and has broken down those barriers.” To survive, companies need to have market-leading products, be innovative, be able to generate high returns to finance growth and have “management with a mindset prepared for the long haul.”

@page_break@Ellenbogen’s focus is on online advertis-ing that he reckons is poised for huge growth — it now accounts for about 3% of global advertising. Yet, he notes, consumers spend about 16% of their time on the Internet: “That will continue to grow, and means online media have substantial pricing power.”

Which brings him to Google. It is a top holding that has been in the portfolio since its initial public offering in August 2004. Yet, Ellenbogen argues, its potential has yet to be reached — even though its price has risen almost sixfold to US$475. “The market has missed the global nature of this company: 40% of revenue is from outside the U.S., 60% of the usage is outside the U.S. and it’s growing faster than the U.S.” Moreover, he argues, the “search” business is only in its infancy and may evolve into mobile search and video search — with Google in the forefront.

At the other end of the media spectrum, Ellenbogen favours several companies that engage in one of the oldest forms of advertising — billboards. Last year, he acquired Lamar Advertising Co., one of the top holdings in the fund. “We’ve known Lamar’s management for several years,” he says. “and are impressed by its business acumen and deployment of capital through the acquisition of additional billboards at reasonable prices in small and mid-sized markets.”

Although TV advertising has been hurt by digital video recorders that can block ads, Lamar is using digitally based billboards, and benefiting from increasing auto traffic and longer commute times.

“Digital displays and the technology to network them have come down to the point at which you can get a very good return on capital,” says Ellenbogen. “Lamar has been the most aggressive of all the outdoor advertisers across the globe.”

Other billboard firms in the fund include Clear Channel Outdoor Holdings Inc. and France’s JCDecaux SA.

Although the TD fund’s name includes “entertainment,” which smacks of Hollywood film-production companies, Ellenbogen argues that entertainment can be broadly defined: “Broadband usage across the globe has reached the point at which more half the time spent online is entertainment-related.”

Searching the Internet for video clips or gambling online also can be classified as entertainment, he adds. Still, the fund includes names such as Time Warner Inc. and The Walt Disney Co.

A Miami Beach, Fla., native, Ellenbogen earned an undergraduate degree in history and science from Harvard University in 1994. After graduation, he worked in Washington, D.C., for four years as chief of staff to Peter Deutsch, a member of Congress who sat on the commerce committee with jurisdiction over media and telecommunications. That sparked Ellenbogen’s interest in those sectors.

Ellenbogen returned to Harvard to study business and law: “I wanted to broaden my horizons and be able to think through a lot of regulatory issues.” In 1999, he received an MBA from Harvard’s business school and a Juris doctorate from its law school. In 2001, after two years in the venture-capital industry, he joined T. Rowe as an analyst.

Bartolo joined T. Rowe in 2002, after earning an MBA at Wharton and serving as director of finance for MGM Mirage Inc.

The TD fund is benchmarked in the U.S. against the Lipper telecommunications average funds index. Last year, Ellenbogen notes, the U.S. version of the fund was tops in its category for one, five and 10 years.

But he does not regard it as a telecom fund: “I see it as an enabling technology, telecom service and media fund. That’s an entire value chain. Think about it: it starts with a company developing the technology, and providing it to the service providers, whether they are fixed-line or mobile. It ends up with the media or interactive media firms that serve customers.”

He says the goal is not to be measured against a benchmark: “My goal is to deliver the best absolute return to shareholders. If I play a game of compounding wealth, pick high-quality companies, the outcome will take care of itself.”

Fund analysts acknowledge the fund’s recent solid record, but also caution that the fund is difficult to classify and may only be suitable for less risk-averse investors. Gordon Pape, Toronto-based fund analyst and publisher of the Internet Wealth Builder, gives the fund a $$$ rating (out of $$$$). “It’s a strange brew,” he says, noting it’s difficult to compare the fund to its peer group. “It’s not a core holding and doesn’t fit into anyone’s portfolio. It’s an add-on, if you want to invest in media and telecom.”

Dan Hallett, president of fund analysis firm Dan Hallett & Associates Inc. in Windsor, Ont., notes that, unlike many other science and technology funds, the TD fund has a broader mandate that allowed it to escape some of the carnage in 2001-02: “Certain funds are difficult to benchmark. This is one of them. That’s not to say performance has been poor; it’s been quite good. But it’s being compared to a more constrained universe that has not done very well.”

Hallett says the TD fund is suitable for “more adventurous” investors who want to make bet on the specific sector. IE