Bruce E. Behrens and Liam D. Burke give credit to the telephone company for the 33 percent average annual growth of their Flag Investors Communications Fund over the past five years.

Unlike many telecommunications funds, which are thinly disguised Internet funds, Behrens and Burke believe in the strength of traditional, or even not-so-traditional, phone companies.

The performance of these companies has boosted their fund to the No. 7 spot among the 5,676 open-ended U.S. stock funds monitored by Bloomberg Fund Performance over the past five years.

"We're looking for a good franchise type of business where there is opportunity for a proprietary edge, better profit margins, with real cash flow," Behrens said. "We want to own companies that aren't just building a field of dreams in an area."

The franchise initially was just Ma Bell.

Known as the Flag Investors Telephone Income Fund when it was born in 1984, the fund was designed as a tax-free exchange vehicle to allow mom-and-pop investors who held shares of American Telephone & Telegraph Co. to swap them for a fund that would manage their investments in the eight companies that were created when AT&T was split up. As the fund's assets grew, its managers gradually invested in other companies.

"It's just evolved along the way, just like this huge industry," Behrens said.

Behrens, who was joined by Burke three years ago, moved cautiously at first, looking primarily, as he still does, for solid management.

"We're kind of betting on the jockeys," he said. "Especially in this industry, number one is management. The art is to understand which managements are spending money the right way."

With MCI Communications Corp., which last year became MCI WorldCom Inc., the bet was on Chairman Bert Roberts, and then chief executive Bernard Ebbers.

When the fund began buying the stock of America Online Inc. in 1996, the Dulles-based company's market value was about $1 billion, Behrens said. Behrens and Burke liked AOL's president, Robert Pittman, and decided the company was well managed and had a valuable brand name, but was out of favor with investors.

Eventually, AOL accounted for 19.6 percent of the fund's holdings, and the managers decided to sell 60 percent of the fund's 3.6 million shares. They still like the company and its management, but price is an issue. They bought AOL at about $4 a share, and it's now trading at about $86.

"Buying at the right price is important," Burke said.

After 15 years, investors have begun discovering that Behrens and Burke just might have a winning formula, or at least a winning industry. The fund attracted $448.2 million in net inflows during the first seven months of this year--four times the new assets that arrived during all of 1998, according to Boston-based Financial Research Inc.

The fund has more than $2 billion in assets and holds 35 to 40 stocks at any given time. With this kind of concentration, it needs to find big companies.

It rarely plunges headlong into the latest fad. Indeed, its top 20 holdings still have some genetic material from companies created by the breakup of AT&T--SBC Communications Corp., Ameritech Corp., Bell Atlantic Inc., Lucent Technologies Inc., US West Inc. and AirTouch Communications Corp.

"We are focusing on trying to understand what their market is, what products or services they are delivering and how they are positioned in that particular market," said Burke. "The stock price pretty much takes care of itself."

They also have an old-fashioned view of the telecommunications industry, though even that's starting to evolve.

"We still look at local telephone, long-distance, international as separate categories, although we know these categories are overlapping and blurring," Burke said. "We can look at equipment and software and have difficulty defining one versus the other. But we're not so hung up on what industry a particular company operates in; we're trying to understand how they're positioned."

The fund's principal risk stems from its concentration on a single industry.

"If the whole communications sector were to fall out of bed for a long time, the risk would be different from regular market risk," Behrens said.

"We refer to it as a sector fund with a difference," he said. "Unlike a biotech fund or energy fund, this is a huge industry with very high growth. It has big companies, little companies, domestic, foreign and multinational, service, components and hardware. Over a reasonable time you ought to make pretty good money even due to the growth of the sector."

Still, he cautioned, "I would not tell anyone to make this their primary IRA retirement investment."

In a bad year it won't be the worst performer, although in a good year it won't be the best, he said.

Behrens, 55, has been in the asset-management business for more than 30 years, starting at Citibank. He moved to Alex. Brown Asset Management, which oversees the fund, 18 years ago and was put in charge of the Flag Investors Telephone Income Fund when it was organized.

Burke, 43, spent 8 1/2 years at AT&T in operations, marketing and sales, a pretty good preparation, he says, for a telephone fund analyst.

"They trained you on all this technology so you understand it," he said. "You understood the linkage between a jazzy new technology and its particular application in the marketplace."

The fund's objective is high current income and long-term growth of capital with minimum risk. In that respect it is similar to the kind of investment that used to be a staple for millions of Americans who bought AT&T and never sold it.