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Mutually Beneficial

The mantra for the top mutual funds
investing in the media sector in the fourth quarter of 2010
was a simple one: Buy Comcast.

Four of the five top funds — Capital Research Global
Investors, Capital Guardian
Trust, FMR LLC, Janus Capital
and Bank of New York Mellon
— counted Comcast as their top
media stock purchase in the period.
Capital Research, the Los
Angeles based fund created
by investment legend Gordon
Crawford, took the most aggressive
stance on Comcast, adding
60.7 million shares in the fourth
quarter alone.

But other funds didn’t hold
back either. Capital Guardian
Trust — Crawford’s other fund
— added 6.7 million Comcast
shares in the quarter. Capital was
followed by FMR LLC — the parent
of the Fidelity family of mutual
funds — which added 5.3
million Comcast shares and Janus
Capital Management, the
Denver fund that was an early
backer of Comcast, which added
3.8 million shares of the stock.

Even the one fund that sold Comcast stock in the quarter
— Bank of New York Mellon, which shed about 1.1 million
Comcast shares — kept its position relatively stable. BONY
Mellon ended the quarter with about 23.6 million shares of
Comcast Class-A stock, its biggest MSO holding.

Wunderlich Securities media analyst Matt Harrigan said
the funds likely bought Comcast shares around the time
its long-awaited NBC Universal joint venture was nearing
completion. Harrigan estimated that with the addition of
its 51% interest in NBCU, Comcast added
about $2 per share of upside to its stock.

While that deal did not close until Jan.
28, late in the year it became evident that
it would receive the necessary regulatory
approvals and without what some had
feared would be onerous conditions. Investors
that may have been holding back
on the sector in the past bought in once
it became evident that network neutrality
and the potential threat from over-thetop
competitors were not to be, Harrigan

That allowed investors to focus more
attention on the strong fundamentals of
the stocks, Harrigan added.
That was apparent in that some funds
also bought large blocks of Time Warner
Cable — Capital Research (1.6 million
shares), FMR (2.4 million) and Janus
(1.7 million shares) — which had a strong
year with revenue and cash flow up 6%
for the year. Time Warner Cable was one
of the strongest in the sector in 2010 — its
shares were up nearly 60% ($24.64 each)
in 2010 — and Comcast finished up more
than 30% for the year. As a whole, MSO
stocks rose almost 42%.

Even when the funds held off on buying
large blocks of MSO stocks, they kept
their positions fairly stable. For example, FMR only bought
15,210 shares of Time Warner Cable in the quarter, keeping
its stake steady at 6.2 million shares. But the mutual-fund
giant bought Cablevision Systems stock — buying 390,282
shares to finish the quarter, with 1.7 million shares — and
Janus more than doubled its position in the company to

“You have a subscription business
with a high free-cash-flow
yield,” Harrigan said. “The only
way that isn’t attractive is if something
really disruptive is about to
hit the business.”

On the satellite side, the funds
mainly concentrated on DirecTV —
one exception, FMR, sold about
19.4 million DirecTV shares in
the period — while shedding
Dish Network shares. Capital Research
added 1.7 million shares
of DirecTV stock, while Janus
added about 1.3 million shares
and Bank of New York Mellon
added nearly 1 million shares in
the period.

Harrigan said that DirecTV
could be affected by looming
National Football League labor
issues. The NFL’s collective bargaining
agreement with its players
association expires in March,
which could lead to a work stoppage or lockout delaying the
2011 season and affecting the satellite-TV provider’s popular
“NFL Sunday Ticket” offering.

“I think there is more upside in DirecTV than anything, if
you’re willing to hold it for 18 months and get past this [profootball]
labor issue,” Harrigan said.

Janus was the biggest seller of Dish — which has been
hampered by subscriber losses and a declining stock price
— unloading 6.8 million shares in the period.