Some Suggestions for Getting Aboard the Runaway Tech Train
All things come to those who wait.
Yeah, right. Try telling that to investors who have been waiting patiently for technology stock mutual funds to slow down long enough for them to safely get on board.
As a fund sector, tech has been king for much of the 1990s: The 50-some funds that specialize in stocks of companies that make computers, develop software, run Internet sites and so on have gained 30.9% a year, on average, during the last five years, according to fund tracker Morningstar Inc.
During the last nine months alone, the average tech fund has rocketed 46.1%, versus just 5.1% for the average U.S. stock fund.
All of which has made things difficult for investors who might have coveted owning a piece of the action but failed to drum up the courage to buy a tech fund.
Yet with so many tech stock prices now near record levels--and with Microsoft President Steven Ballmer recently arguing that his own stock and those of many other tech firms are “absurdly” overvalued--now certainly isn’t the time to pour your life savings into a tech fund, many experts say.
Stocks held by tech funds are, on average, now about 40% more expensive (in terms of price-to-earnings ratios) than those in the Standard & Poor’s 500, which itself is hardly cheap.
But what if you can look out five years or more? If tech remains a premier growth industry--fueled in part by the continuing boom in Internet use worldwide--isn’t there a strong argument for investing directly in a tech fund with some portion of your assets?
If you can’t help seeing a golden future despite high stock prices, the best strategy may be to identify some tech funds that appeal to you and slowly ease in. If the sector suffers a major pullback in prices, you can accelerate your purchases.
Where do you start your research? First, ask yourself how diversified a fund you want to own.
Funds that diversify among many tech businesses--semiconductors, computer hardware, telecommunications, Internet commerce and networking, for example--are likely to be less volatile over time than funds that focus on just one area, such as Internet-specific stocks.
“For most people, the diversified tech funds will make a better choice,” said Christine Benz, an associate editor at Morningstar.
Invesco Technology II (phone: [800] 525-8085), Seligman Henderson Global Technology ([800] 221-2450), United Science & Technology ([800] 366-5465) and T. Rowe Price Science & Technology ([800] 638-5660) have some of the best historical return-versus-risk scores of the diversified tech fund group, according to Morningstar.
But note that even diversified tech funds can provide a white-knuckle ride at times. One way to assess a fund’s potential volatility is to check how it fared in 1997’s fourth quarter and in 1998’s third quarter. On average, tech funds fell 14% and 11%, respectively, during those market downdrafts.
Because technology funds are inherently volatile--a reflection of how rapidly technology itself is changing, creating overnight success stories among companies as well as overnight disasters--dollar-cost averaging can be a wise strategy for tech fund investors.
With this approach, you invest the same dollar amount each month or quarter, rather than risk your entire wad at once--at what could be a near-term sector peak.
“At this point, with tech having enjoyed such a strong run-up, I’d definitely set up a monthly averaging program,” Benz said.
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What if you want to bet on a specific part of the tech industry, rather than on a diversified portfolio?
The Internet probably comes to mind when many investors think of a tech niche. Several funds focus on the Net, including the Internet Fund ([888] 386-3999), Munder Net Net ([800] 438-5789), WWW Internet ([888] 263-2204) and Monument Internet ([301] 215-7550).
But these funds can vary significantly in how they judge what’s an “Internet” stock. And the recent dramatic swings in many Net stocks ought to give all but the most aggressive investors pause.
Even so, some Net fund managers say the sector is maturing to some degree. During the summer plunge in many Net stocks, “some of the [speculative] excesses were washed out,” said Alexander Cheung, manager of Monument Internet in Bethesda, Md.
Yet Cheung also predicts that electronic commerce during the upcoming holiday retail season will triple over last year’s level, pumping up the excitement barometer for Net stocks once again. (Indeed, the stocks may already have begun to reflect those expectations.)
While the Internet gets the glory, some of the hottest tech funds in recent years have been those focused on other niches.
Fidelity Investments, the sector fund king, doesn’t offer an Internet-only portfolio. But it does have several specialized tech plays among its Fidelity Select funds, including those centered on computers, developing communications, electronics and software.
Fidelity Select Computers ([800] 544-8888) has gained 42.8% a year over the last three years, according to Morningstar. That’s even more than WWW Internet’s 37% annualized returns in the period.
But Fidelity Select Computers tends to own a lot more than computer hardware makers. At midyear, for example, its top three holdings were networker Cisco Systems, chip maker Texas Instruments and Microsoft.
Another fund, the Guinness Flight Wired Index ([800] 915-6565) in Pasadena, counts Charles Schwab and energy firm Enron among its major holdings.
How are those “tech” stocks? Guinness invests not only in traditional tech firms but also in “a broad range of enterprises that are using technology, networks and information to reshape the world,” as the fund describes it.
That’s another example of why it’s crucial to study a tech fund’s portfolio and history before buying.
Pay attention to management style, especially as it relates to portfolio turnover. A lot of tech managers have been flipping stocks this year, pushing up their turnover rates. In a fast-moving market, active trading can pay off, but over the long haul it drives up costs borne by fund investors.
It can also create tax headaches for investors by necessitating large annual capital gains distributions.
Note: Many tech funds will be making hefty capital gains distributions before year’s end, reflecting profits locked in during the year. For this reason, you may want to delay new purchases until after a fund’s “record date,” when you no longer would be entitled to the payment--and thus wouldn’t incur an instant tax liability.
The danger of waiting, of course, is that a fund could keep climbing.
(The caveat about year-end tax traps doesn’t apply to people investing within a tax-sheltered 401[k] plan or individual retirement account, of course.)
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There are other cost aspects to consider, as technology funds are fairly expensive to manage in general. On average, they charge shareholders about 1.8% of assets annually in management fees.
With tech stocks on a roll, costs haven’t mattered much lately. But they may eventually. “When your fund is earning 40% or 50% [a year], you won’t care much about expenses, but you’ll feel them on the way down,” noted Benz.
Among the lowest-cost funds is T. Rowe Price Science and Technology, which charges about 0.9% in yearly expenses. The fund has gained 27.1% a year over the last three years, which lags the 33.1% sector average but tops the 15.8% average return for general domestic stock funds, Morningstar says.
Another solid choice, combining reasonable costs and good performance, is Invesco Technology II, which has gained 28.1% a year over the last three years.
But neither of those portfolios has generated the returns of Firsthand Technology Value ([888] 883-3863) in San Jose. It’s up 38.9% a year over three years.
Another top performer: Northern Technology ([800] 595-9111), up 48.4% a year in three years. Firsthand and Northern Tech both are rated very high by Morningstar for risk-adjusted returns over the last three years.
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Before you even begin to research tech sector funds, ask this question: Do you really need one? Even if you don’t own a pure-play tech fund, you may have sizable technology exposure through other mutual funds.
Roughly five dozen general stock funds have or recently had a majority of their assets in tech stocks, including Janus 20, White Oak Growth and several funds in the PBHG and Van Wagoner families.
The S&P; 500 itself has about a 20% tech stock weighting, and small-growth stock portfolios are closer to 30% tech, on average.
And note that a lot of stocks in various industries have become de facto tech plays. You might already own much more tech than you think.
Russ Wiles is a regular contributor to The Times. He can be reached at russ.wiles@pni.com.
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Tech’s Hot Decade
The average technology stock mutual fund has generated returns far above the average general stock mutual fund for most of the 1990s--although tech investors have had to contend with high volatility. Average total returns for tech funds versus general U.S. stock funds, each year and year to date:
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Source: Morningstar Inc.
