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This Asset is Expensive, Opaque, and Not Widely Used. And Investors Can’t Get Enough.

Why some asset managers are all in on 5G technology.

Neuberger Berman is betting big on the future of 5G. The firm is so keen on the technology that it has funneled $3 billion into an equities strategy focused on the theme since December 2017.

“We believe 5G will serve as a key building block that will connect and enable a new wave of innovations and applications," said Yan Taw Boon, director of Asia research and co-portfolio manager at the firm, via email. 

The firm is not alone in its investment in 5G, the next generation of wireless mobile technology. The promises of what will happen once 5G is rolled out are huge: autonomous cars will have better sensors, surgeons will be able to operate remotely, and virtual augmented reality, which superimposes computer images on a user's view of the real world, will finally come to fruition. 

But these investments come with a fair amount of risk. High asset prices, lack of clarity surrounding potential winners and losers in the space, and persistently negative public sentiment about potential health risks posted by the technology — in spite of evidence to the contrary — are all reasons the 5G network could be stalled.

For those who want to bet on the technology, the market is broad. Investors can consider infrastructure, real estate, and equities as potential ways to bet that the 5G market will succeed. 

Here’s how 5G will be different than previous 3G and 4G networks: “Speed is key, but symmetry is becoming more important,” Matt Evans, a partner at investment management firm AMP Capital, which invests around the 5G theme, said by phone. In other words, different tasks like downloading and uploading a video will take the same amount of time for a device to complete. “Your upload speed should be similar to your download speed," he said. "We used to talk about reliability. Now the consistency is more of a focus.” 

Neuberger Berman's 5G fund launched in December 2017, said Boon. The fund invests in network and data infrastructure, the internet of things (IoT devices), and services and applications related to 5G, he said. Boon added that the firm believes that active management is necessary for a 5G portfolio, because of the cycle’s anticipated length and because the market is continuing to evolve. 

Some are more cautious on 5G’s prospects for investors, however.

“From an investing standpoint, the way I look at 5G is that this could absolutely be transformative,” said Andrew Chanin, co-founder and CEO of ETF provider ProcureAM. “You could look at 5G and say it's the be-all, end-all. Or you could look at it like a cassette tape, which was replaceable.”

The sector has nonetheless attracted specialists in various asset classes. 

Infrastructure investors view cell towers, or the large structures from which mobile carriers hang their equipment, as their way into 5G. 

“We believe one of the best ways to benefit is to invest in one of the sectors that provide the necessary infrastructure to support the continued growth in data consumption,” said Humberto Medina, a senior investment analyst at asset manager Cohen and Steers, by phone. 

Investing in cell towers is attractive because it doesn’t involve having to invest in the equipment itself, just the tower that the equipment is attached to, according to Medina. 

What’s more, multiple wireless companies can attach their equipment to the same tower, which means that as the market has grown and as wireless companies have pushed into new regions, tower owners are able to find more buyers for tower space.  

According to Medina, the best towers have three or four tenants that have five- to seven-year contracts. He added that there is very little churn in the market, with a 98 percent renewal rate each year.  

But there is zoning to consider. According to CellTowerInfo, a website devoted to explaining cell tower leases and developments, the zoning is based on local jurisdiction regulations, rather than any sort of federal law. The Telecommunications Act of 1996 disallows jurisdictions from prohibiting cell towers, but cities and towns are still allowed to regulate where these towers are placed, which can make it difficult for new entrants in the market.  

“[Cell towers] are difficult-to-replicate assets because of the zoning restrictions,” Medina said. 

Cell towers are innately tied to wireless providers like AT&T and T-Mobile, according to Medina. So, he noted, the deal between T-Mobile and Sprint to merge, which was announced this summer, could be a boon for the cell tower industry.  

“In our view, a merger within Sprint and T-Mobile would create a stronger third player that would be more poised to invest in 5G,” Medina said. “It would make U.S. companies stronger to invest in 5G.” 

Then, there are fiber-optic networks, which offer faster speeds than traditional technologies, such as cable and DSL, according to Broadband Now, which says it aims to bring broadband to everyone. These networks are made up of fibers that are connected to the base of cell towers, according to the Fiber Optic Association’s reference guide.

Many local companies provide this service, as well as more nationally known companies like Verizon. Broadband Now shows that Texas and Iowa have the most fiber-optic network providers, with 159 and 184 providers, respectively. 

“We’re seeing more demand from the mobile operators to ensure at the end of the day that every tower is fiber connected,” AMP Capital's Evans said. 

Satellite operators, too, are benefiting from the interest in 5G investments.  

“Most people don’t think about how data is being sent from point A to point B,” Chanin said by phone. “Unless you’re in one of these contained networks, a lot of the data is being transferred to satellite systems.”

Chanin said he considers satellite companies to be the “toll operators” of 5G. In other words, much of the system will have to use space satellites to transmit data. 

“There's no doubt that everyone in the infrastructure space is looking to play in this sector,” Evans said. “There's a doubt that everyone has the ability to do so."

So, is 5G worth all the hype?

“The concern I have is that the hype could get ahead of the technology or the reality,” said chief equities strategist John Conlon at registered investment adviser firm People's United Advisors. “5G is going to take years to roll out.” He added that it may take even longer for people to benefit from the network.   

According to Conlon, the infrastructure will require “substantial investment” not just from carriers, but also from customers expecting to benefit from it. 

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Public sentiment about 5G could also pose a risk to investors, according to Chanin. “There are concerns of health risk,” he said, noting that the public is worried about potential radiation, despite concerns having been rebuked.  

The New York Times debunked this concern in a July 2019 piece entitled “The 5G Health Hazard That Isn’t,” which showed that most of the concerns were related to an inaccurate chart published in 2000. Still, the fear persists.

Evans noted that in previous cycles, the demand on the networks has been larger than expected.  

“What we’ve seen over the past couple of cycles is that people consistently underestimate the demands on networks,” Evans said. “When we went from 3G to 4G, there was an underestimation of how people would use it. Operators were playing catch up.” 

There’s also a lack of clarity on what companies will actually do well in a 5G environment.  

“Everyone thought they knew who the obvious winners or losers with the internet would be,” said Bill Studebaker, president and chief investment officer of ETF provider ROBO Global. “Most of them are not even around anymore.”