Want a Fund That Invests in Other Sectors?
It has been possible to beat the market this year without technology stocks.
It just hasn’t been very likely.
Only about 1 in 10 of the U.S. domestic stock mutual funds that beat the Standard & Poor’s 500 blue-chip index in the first nine months of this year did so with little or nothing in the tech sector.
In other words, most of the fund managers who have topped the S&P;’s gain--now 16.9% year-to-date, including dividends--have needed a heavy investment in tech stocks to do it.
Investors who may be growing increasingly wary of tech stocks’ stratospheric price levels, however, may also be looking around for fund managers who have picked stocks well enough in other sectors to produce heady returns.
There are some--but not very many. And in most cases, these no- or low-on-tech funds limit their investments to narrow industries such as energy or health care.
Among the few diversified funds that have trounced the S&P; this year without a significant investment in tech shares is the Baron Small Cap fund ([800] 992-2766) in New York. It’s up 49.4% year-to-date, on the strength of such non-tech stocks as cable TV firm Century Communications and apparel firm Kenneth Cole Productions.
“It takes a lot of particular expertise to truly understand technology well--an expertise that when I look at myself in the mirror, I don’t have,” said Cliff Greenberg, manager of the Baron fund.
According to fund tracker Morningstar Inc., Baron Small Cap had just 0.2% of its assets in tech stocks in the period. Morningstar defines tech shares as those of companies in the software, hardware or Internet-related businesses.
The Baron fund’s biggest holding now is UnitedGlobalCom, which owns cable-TV networks overseas. In all, communications companies account for one-quarter of the fund’s holdings, and media companies such as SFX Entertainment account for 15%.
“The way we manage money here is kind of to find small, growing enterprises and own them for a while,” Greenberg said. “The opportunity for cable companies outside the U.S. is better than here in the States.”
Another general fund that has soared without classic tech stocks is Fountainhead Special Value ([800] 868-9535), which is up 107% year to date.
Fountainhead, based in Houston, is a $15-million-asset fund that has boosted returns by focusing on the telecommunications sector--which, of course, some investors may argue is essentially part of the technology sector.
The fund’s big winners in telecom have included Global Crossing and Nextel Communications.
Richard F. Lawson, head of the Weitz Hickory Fund in Omaha, also has overcome the self-imposed handicap of avoiding shares such as America Online and Microsoft.
Lawson’s $800-million fund--which is closed to new investors--is up 29.2% this year.
“I like to think about at least a five- or 10-year time horizon, and I find that it’s very difficult to predict the success of most tech companies over that kind of time horizon,” Lawson said. “It’s very hard for me to value those companies, but when I try and look them, it seems as if they are certainly quite expensive.”
Weitz Hickory has the only five-star Morningstar rating in the small-blend fund category.
“I happen to have found a lot of companies that I like that are small companies, but our prospectus doesn’t limit us to any one size,” Lawson said. “We’ll buy whatever makes sense.”
Another Weitz offering, the Weitz Value fund ([800] 232-4161), also is beating the S&P; this year--and it is open to new investors. Among its winners has been SLM Holding, or Sallie Mae, the student loan financier.
Telephone & Data Systems, a telephone company, has been a big holding in both Weitz funds.
“That’s obviously been a good area, and this has been a particularly good stock this year,” Lawson said.
Apart from those diversified funds, beating the S&P; without classic tech names has this year been the domain of many funds that focus on energy stocks, including Boston-based Fidelity Select Energy Service ([800] 544-8888), up 67.2% year-to-date as crude oil prices have rebounded. But over the last three years, investors in that fund have earned a modest 9% a year--which tells you that this year’s big gain followed heavy losses in the preceding year, when oil prices sank.
Some health-care funds also have shone this year, including tiny Rydex Biotechnology fund ([800] 820-0888) in Rockville, Md., and Janus Global Life Sciences ([800] 525-8983) in Denver.
The biotech sector has been hot this year even though many other health-care sectors have stumbled.
Meanwhile, investors in Denver-based Invesco Leisure fund ([800] 525-8085), are up 46% this year. The Invesco fund, Like Fountainhead, has been loaded with telecom names, such as cable firm Media-One. Its holdings also have included Time Warner, advertising firm Omnicom Group and electronic TV guide service Gemstar International.
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Funds for the Tech-Phobic
Only a relatively small number of U.S. stock mutual funds with low tech-stock investments have been able to beat the blue-chip Standard & Poor’s 500 index this year. Here’s a sampling of that elite group--most of which are specialty stock funds in narrow industries:
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Total investment return: Fund 1999 YTD 3 yrs.* Fountainhead Special Value +107.0% NA Fidelity Select Energy Service +67.2 +9.0% Baron Small Cap +49.4 NA Osterweis Fund +49.3 NA Lindner Utility +48.6 +19.0 Rydex Biotechnology +47.2 NA Invesco Leisure +46.0 +33.6 Invesco Energy +45.5 +7.7 Ivy Global National Resources +40.7 NA Fidelity Select Natural Gas +33.7 +3.0 Weitz Hickory +29.2 +37.7 Fidelity Select Multimedia +28.9 +30.7 Janus Global Life Sciences +27.6 NA Gabelli Value +24.8 +31.4 Weitz Value +22.2 +31.1 S&P; 500 (incl. dividends) +16.9 +25.8
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* Three-year annualized return
NA: Not available (fund didn’t exist for entire period)
Sources: Morningstar Inc., Bloomberg News
