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 results of the past few years,” says Gardner-Walker. “Dollar-cost averaging has come in handy.”
That is, she and her husband Perry, a management consultant, both invest similar amounts at regular intervals. Therefore, Gardner-Walker has bought some shares of her technology fund when tech stocks were high and some when they were low. Over the long term, this approach will lower the average cost-per-share and boost potential gains. As Denita and Perry are both in their 40s, they intend to be long-term investors as they put away money for their 10-year-old son Brandon’s education and their own retirement.
“Technology is certainly one of the more dynamic and innovative parts of the economy,” says Jeffrey Rottinghaus, manager of the T. Rowe Price Global Technology fund (PRGTX) and the T. Rowe Price Developing Technology fund (PRDTX). “A lot of professional investors have a shorter-term horizon. As an individual investor, if you have a mutual fund, you can take a longer-term approach.” That’s precisely the outlook recommended by Wilbert McZeal, a certified financial planner in Los Angeles who is affiliated with AIG Financial Advisors. “I insist that my clients commit to hold their funds for longer than five years,” he says.
Advisable allocations
So far, dollar-cost-averaging in her specialized tech fund has paid off for Gardner-Walker. With the Science and Technology fund generating average returns of almost 14% for the last 10 years, her holdings in the tech fund are now roughly one-third of her Wadell & Reed portfolio, says Marilyn Broussard, a certified financial planner with Waddell & Reed in Arden Hills, Minnesota. Broussard has advised Gardner-Walker to diversify and shift some funds to the Waddell & Reed Advisors Dividend Income A fund (WDVAX), a large-blend fund that has less than 10% of its assets in technology stocks. “Generally, my clients will have a 5% to 15% allocation to the Science and Technology fund,” says Broussard, “depending on their temperament.”
Going for growth
Of course, a sector fund is a way to get concentrated exposure to technology. But many diversified funds have significant tech holdings as well. For instance, Broussard also recommends the Waddell & Reed Adv Vanguard A fund (UNVGX), which holds a mix of large-cap growth stocks, nearly 38% of which were information technology stocks as of Dec. 31, 2006.
“When I look across the investment landscape, seeking fast-growing, innovative companies with sustainable competitive advantages, I find many in the tech sector,” says Conrad Herrmann, portfolio manager of the Franklin Flex Cap Growth A fund (FKCGX). Herrmann says that his multi-cap growth fund is currently overweight in technology, at about 35% of its assets.
Karen Dolan, a mutual fund analyst at Morningstar, agrees that many investors will be well-served by finding their exposure to technology in a diversified fund rather than in a specialized sector fund. “Most tech funds have high expenses and inexperienced managers,” she notes.
Following the smart money
At present, some managers with outstanding long-term records at diversified funds are putting more technology stocks into their portfolios. “Bill Miller at Legg Mason Value Fund and Bill Nygren of Oakmark Select, for example, have been scooping up tech stocks that have had tough going, such as Dell, eBay, Intel, and Yahoo,” says Dolan.
The current attraction of tech stocks, according to Dolan, stems from a combination of relatively low valuations and
strong fundamentals. “Today’s technology companies have slimmed down, cut costs, and cleaned up their balance sheets since the 1990s.” She points to semiconductor manufacturer Analog Devices and communications equipment provider Corning Inc. as good examples of companies that have become more financially sound since the tech sector slumped.
Another observer who’s upbeat on tech is John Blood, vice president of investments at Commonwealth Financial Network in Waltham, Massachusetts. “Many corporations have a great deal of cash on their balance sheets,” he says. “They are likely to use that cash for capital spending and that spending may be largely on technology.” That is, cash-rich companies will invest in systems and equipment to keep productivity up in an increasingly competitive economy.
More spending on technology, in turn, is likely to benefit stocks in that sector. “Pricing power is coming back at some technology companies,” says Lincoln Anderson, chief investment officer and chief economist at LPL Financial Services in Boston. If tech companies can command higher prices, they may enjoy plumper profits and return to favor on Wall Street.
Balancing act
Even if an upturn is in the cards, Dolan is not recommendi
ng that investors load up on tech-heavy funds. “The signs are pointing in the direction of a tech comeback,” she says, “but if and when that will happen is unknown. Your best approach might be to rebalance your portfolio by cutting back on your value funds which have performed very well and increasing your growth funds, including those holding technology companies.”
Portfolio rebalancing is also urged by Anderson. “It’s time to worry about your winners,” he says. “Assets that have had big runs can shift in the other direction.” All the areas that have been leaders recently, including foreign stocks and value stocks and small caps, may be riskier now than they were five years ago.
Think big
Large-cap technology stocks currently look “pretty attractive,” to Rottinghaus. He notes that toward the end of an economic cycle when interest rates are relatively high, smaller companies have more difficulty accessing the funds they may need to grow their business. Larger companies will have the capital to withstand the effects of a slowing economy.
Along those lines, small caps may be in for a year of slower growth, compared with the giant firms in the S&P 500 Index, according to Anderson. “Nasdaq might do even better than the S&P 500,” he says, “because of strength in technology.”
Home runs
Just as investors might do well to move some money from small-cap to large-cap funds, it also may be time to lighten up on funds holding foreign stocks. Anderson believes that some of the money now flowing into foreign stocks, after five straight years of outperformance, stems from the momentum of investors who are chasing what’s been hot rather than investors who are weighing the fundamentals of the stocks.
Of course with technology, investors never know what’s next. But for Ralph and Cheryl Wells, it’s a growing nest egg to fund their retirement and the education expenses of their children Amari, 12, and Evan, 7. “Some areas of technology are little known but may eventually become important, just as the Internet became suddenly popular,” says Wells, a project manager for a large technology firm in Dallas. “Take the area of content management, for example. Companies such as Disney may want to target certain demographics for specific products. Wireless technology will make this possible–this is an area that might really take off.
FUND NAME
TICKER
1-YR RETURN %
3-YR RETURN %
5-YR RETURN %
MINIMUM INITIAL PURCHASE
PHONE
Technology
Jacob Internet
JAMFX
19.44
24.42
2500
888-522-6239
Matthews Asian Technology
MATFX
21.29
17.92
15.24
2500
800-789-2742
Royce Technology Value Service
RYTVX
8.53
-1.26
9.72
2000
800-221-4268
Waddell & Reed Adv Science & Tech A
UNSCX
7.57
13.57
7.2
500
800-366-5465
T. Rowe Price Global Technology
PRGTX
10
10.38
7.15
2500
800-638-5660
Diversified Emerging Mkts
T. Rowe Price Em Eur & Mediterranean
TREMX
34.74
40.7
37.35
2500
800-638-5660
Quant Emerging Markets Ord
QFFOX
31.5
29.28
30.44
2500
800-326-2151
Excelsior Emerging Markets
UMEMX
33.79
30.95
28.34
500
800-446-1012
Evergreen Emerging Markets Growth A
EMGAX
46.21
31.68
28.23
1000
800-343-2898
Foreign Large Blend
RS Emerging Markets A
GBEMX
35.79
32.87
28.02
5000
800-343-0817
AllianceBernstein Intl Growth A
AWPAX
25.04
22.88
20.29
2500
800-227-4618
Rochdale Atlas
RIMAX
33.26
25.65
19.73
1000
800-245-9888
Phoenix Foreign Opportunities A
JVIAX
29.3
24.48
18.25
500
800-243-1574
Henderson Intl Opportunities A
HFOAX
28.03
21.49
18.06
500
866-343-6337
Foreign Large Growth
Janus Overseas
JAOSX
47.21
32.21
19.19
2500
800-525-0020
Marsico International Opportunities
MIOFX
23.95
20.01
17.68
2500
888-860-8686
Columbia Marsico Intl Opp A
MAIOX
23.34
19.92
17.4
2500
800-321-7854
Fidelity Advisor Diversified Intl A
FDVAX
16.6
18.2
16.16
2500
877-208-0098
Forward International Equity
FFINX
34.4
21.29
15.95
4000
800-999-6809
Foreign Large Value
Quant Foreign Value Ord
QFVOX
31.03
24.69
23.55
2500
800-326-2151
DFA Intl Value II
DIVTX
34.42
26.02
22.41
2,000,000*
310-395-8005
AllianceBernstein Intl Val A
ABIAX
34.18
24.94
22.13
2500
800-221-5672
Dodge & Cox International Stock
DODFX
28.01
25.56
20.78
2500
800-621-3979
Thomas White International
TWWDX
31.8
25.84
19.22
2500
800-811-0535
Large Blend
CGM Focus
CGMFX
14.95
17.42
17.25
2500
800-343-5678
Janus Contrarian
JSVAX
24.58
21.01
15.69
2500
800-525-0020
Tocqueville
TOCQX
17.05
14.05
12.59
1000
800-697-3863
MassMutual Select Focused Value A
MFVAX
19.65
11.11
12.33
0
888-309-3539
Fidelity Advisor Industrials A
FCLAX
14.86
16.63
12.27
2500
877-208-0098
Large Growth
Columbia Marsico 21st Century A
NMTAX
18.53
15.99
15.9
2500
800-321-7854
Marsico 21st Century
MXXIX
18.65
16.1
15.83
2500
888-860-8686
Amana Trust Growth
AMAGX
15.41
19.51
11.34
250
800-728-8762
Legg Mason Growth Trust Primary
LMGTX
0.62
3.45
10.46
1000
800-822-5544
Fidelity Fifty
FFTYX
11.13
9.83
9.86
2500
800-343-3548
Large Value
Pioneer Cullen Value A
CVFCX
16.63
14.71
13.92
1000
800-225-6292
Hillman Focused Advantage
HCMAX
12.3
16.09
13.9
5000
800-773-3863
Hancock Horizon Value A
HHGAX
18.03
17.31
13.87
1000
800-259-1926
Yacktman Focused
YAFFX
16.13
7.83
13.69
2500
800-525-8258
Yacktman
YACKX
15.95
7.96
13.27
2500
800-525-8258
Mid-Cap Blend
RS Value A
RSVAX
16.37
18.89
23.11
5000
800-766-3863
Kinetics Paradigm
WWNPX
27.81
21.52
20.39
2500
800-930-3828
Hodges
HDPMX
17.77
19.78
17.95
250
866-811-0224
Fidelity Select Defense & Aerospace
FSDAX
20.66
19.36
16.96
2500
800-544-9797
Empiric Core Equity A**
EMCAX
11.03
13.58
15.49
5000
888-839-7424
Mid-Cap Growth
FBR Small Cap
FBRVX
28.49
19.76
20.78
2000
888-888-0025
Baron Partners
BPTRX
21.55
25.54
16.82
2000
800-442-3814
Delaware American Services A
DASAX
14.84
14.01
15.22
1000
800-523-1918
Legg Mason Opportunity Prim
LMOPX
13.41
11.25
14.33
1000
800-822-5544
Thornburg Core Growth A
THCGX
18.1
18.5
13.9
5000
800-847-0200
Top five funds by category and top 10 specialty technology funds ranked by five-year return.
Only distinct non-institutional shares open to new investors with a minimum initial investment of no more than $5,000 were considered. Data through 1/9/2007.
FUND NAME
TICKER
1-YR RETURN %
3-YR RETURN %
5-YR RETURN %
MINIMUM INITIAL PURCHASE
PHONE
Technology
Fidelity Select Software & Comp
FSCSX
24.92
10.39
6.83
2500
800-544-9797
Wasatch Global Science & Technology
WAGTX
15.95
9.01
6.72
2000
800-551-1700
Turner New Enterprise
TBTBX
9.32
10.72
6.69
2500
800-224-6312
RS Internet Age A
RIAFX
2.45
6.51
6.66
500
0
800-766-3863
Henderson Global Technology A
HFGAX
10.36
10.62
6.62
500
866-343-6337
Mid-Cap Value
ICON Materials
ICBMX
19.46
20.82
16.11
1000
800-764-0442
Phoenix Mid-Cap Value A
FMIVX
26.3
17.88
15.22
500
800-243-1574
Delafield
DEFIX
20.38
15.53
14.86
5000
800-221-3079
Fidelity Value
FDVLX
15.09
16.81
14.23
2500
800-343-3548
Wells Fargo Advantage Mid Cap Dis Inv
SMCDX
18.27
15.65
13.93
2500
800-368-1030
Moderate Allocation
Bruce
BRUFX
17.72
25.84
29.42
1000
800-872-7823
ING T. Rowe Price Cap Apprec S
ITCSX
14.64
12.93
12.63
0*
800-584-6001
T. Rowe Price Capital Appreciation
PRWCX
14.54
12.16
12.22
2500
800-638-5660
Delaware Dividend Income A
DDIAX
19.65
10.69
11.1
1000
800-523-1918
American Funds Inc Fund of Amer A
AMECX
20.29
11.99
10.97
250
800-421-0180
Small Blend
Bridgeway Ultra-Small Company Market
BRSIX
1.48
11.7
21.27
2000
800-661-3550
Pacific Advisors Small Cap A
PASMX
35.05
26.08
20.01
1000
800-989-6693
Gartmore Small Cap A
GSXAX
29.16
25.78
19.13
2000
800-848-0920
Keeley Small Cap Value
KSCVX
19.55
22.66
18.67
1000
888-933-5391
Pacific Capital Small Cap A
PCSAX
17.53
16.17
17.34
1000
800-258-9232
Small Growth
Royce Value Plus Service
RYVPX
19.35
20.09
21.58
2000
800-221-4268
Baron Small Cap
BSCFX
11.83
13.96
13.17
2000
800-442-3814
UMB Scout Small Cap
UMBHX
12.07
13.86
12.5
1000
800-996-2862
Baron Growth
BGRFX
15.5
15.62
12.3
2000
800-442-3814
Excelsior Small Cap
UMLCX
16.35
13.59
11.93
500
800-446-1012
Small Value
James Small Cap
JASCX
12.49
15.13
18
2000
800-995-2637
Heartland Value
HRTVX
28.02
12.52
16.5
5000
800-432-7856
Tamarack Micro Cap Value S
TMVSX
21.69
17.35
16.31
1000
800-422-2766
Northern Small Cap Value
NOSGX
20.28
16.8
16.16
2500
800-595-9111
Royce Opportunity Inv
RYPNX
18.76
13.5
15.97
2000
800-221-4268
Natural Resources
U.S. Global Investors Global Res
PSPFX
22.19
33.4
41.03
5000
800-873-8637
Jennison Natural Resources B
PRGNX
20.55
32.5
30.4
2500
800-225-1852
RS Global Natural Resources A
RSNRX
8.11
27.38
28.02
5000
800-766-3863
Van Eck Global Hard Assets C
GHACX
21.98
30.04
26.81
1000
800-826-1115
Ivy Global Natural Resources A
IGNAX
25.79
27.61
25.93
500
800-777-6472
Precious Metals
U.S. Global Investors WrldPrecMineral
UNWPX
52.3
26.26
48.05
5000
800-873-8637
U.S. Global Investors Gold Shares
USERX
50.19
23.11
41.41
5000
800-873-8637
USAA Precious Metals and Minerals
USAGX
43.19
21.19
38.6
3000
800-531-8448
Van Eck Intl Investors Gold A
INIVX
45.23
22.03
38.05
1000
800-826-1115
Evergreen Precious Metals B
EKWBX
35.43
19.47
37.02
1000
800-343-2898
Real Estate
CGM Realty
CGMRX
9.01
30.46
34.24
2500
800-343-5678
Alpine International Real Estate
EGLRX
38.74
30.35
29.54
1000
888-785-5578
Strategic Partners Real Estate Sec A
PURAX
35.95
30.09
28.17
2500
800-225-1852
ING Global Real Estate A
IGLAX
40.42
29.72
26.28
1000
800-992-0180
Phoenix Real Estate Securities A
PHRAX
36.27
27.58
26.02
500
800-243-1574
World Stock’
Polaris Global Value
PGVFX
24.57
19.4
21.05
2500
888-263-5594
Oakmark Global I
OAKGX
24.18
17.59
18.85
1000
800-625-6275
Templeton Global Smaller Comp A
TEMGX
24.3
19.12
18.78
1000
800-342-5236
Delaware Global Value A
DABAX
28.61
22.46
18.46
1000
800-523-1918
Vanguard Global Equity
VHGEX
23.43
18.33
17.71
3000
800-662-6273
Source: Morningstar Inc.
Morningstar makes every effort to ensure the accuracy and completeness of this data but cannot guarantee it.
*available through 401(k)
**Formerly Texas Capital Value & Growth A (tcvgx)