Time For Tech?

As YouTube continues to generate buzz and Google trades at near $500 per share, the tech sector may be ready to regain market leadership

Investors who retreated to the sidelines following the dot-com bust, may soon want to re-enter the game. “There are lots of exciting developments in technology today,” says Ralph Wells, who has some 35% of his portfolio in technology. “They are not just in TV and telecom, but also in new areas such as nanotechnology. I like to have some technology in my portfolio.”

Indeed, the money managers and financial advisers we spoke with echo Wells’ comments, pointing to several trends and new product announcements that should drive tech spending in the coming months. Some of the trends that will play out are the continued mainstream adoption of flat-panel televisions as well as the growing use of streaming video. What’s more, the rollout of Microsoft’s new operating system, Windows Vista, the launch of Apple Inc.’s iPhone, and the debut of Yahoo’s new Panama search platform are expected to have a trickle-down effect.

While Wells and other tech-minded investors may be ready for a tech revival, it’s important to maintain some perspective. Though the tech-heavy Nasdaq composite index has climbed steadily since last summer, it closed at 2,415.29 at the end of last year, which is still less than half of the high-water mark reached seven years ago. And this is at a time when the Dow Jones industrial average continues its string of record-high closes.

These lean years for technology stocks have naturally stunned mutual funds in the tech sector. In 2006, specialized technology funds returned about 7%, according to fund tracker Morningstar. That was well below the norm for all domestic equity funds, which gained more than 12%. Still, it’s an improvement compared with its five-year average annualized return of less than 2% through Jan. 31–by far the worst performance of any stock-fund category followed by Morningstar.

In the past five years, investors prospered in gold, real estate, oil, foreign stocks, small caps, and value issues-investment categories that continued to lead the way in 2006. All the while, tech stocks have crawled along, far behind other sectors. A dollar invested in the average gold fund five years ago would be worth around $3.71 now; in real estate, a dollar would have grown to about $2.04. But in tech funds? You’d now have another nickel to keep your dollar company.

Part of tech’s allure, however, is the phenomenal returns this sector produced in years past–particularly in the late 1990s. According to Morningstar, tech funds returned 48.07% in 1995, 54.75% in 1998, and a stellar 119.90% in 1999. But will tech turn around in 2007?

Denita Gardner-Walker of Landenberg, Pennsylvania, certainly hopes so. A self-employed sales director for Mary Kay cosmetics, she has owned Waddell & Reed Advisors Science and Technology fund (UNSCX) for more than 10 years. With a degree in chemical engineering, she has remained steadfast in her belief in technology, and in technology investing. “I’ve seen a lot of growth in my portfolio and a good deal of that has come from this fund,” she says. “I’m not at all disillusioned by the investment

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