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Personal Business: SMART MONEY
HIGH TECH WITHOUT THE HIGH WIRE
If you want to capture a piece of the growth in technology stocks, you could buy into a sector mutual fund that specializes in such issues. But there's a way to make a high-tech play without the unsettling volatility of sector funds: Invest in a diversified equity fund with a large technology stake.
Either way, money managers say technology shares should be part of any growth portfolio over the next five years. Innovation is rampant, and many tech stocks are reasonably valued, such as Compaq, with a price-earnings ratio of 9, and Intel at 11, says Chip Morris, manager of T. Rowe Price Science & Technology Fund. The electronic content in everything from coffeemakers to automobiles is expanding. And from a global view, computers, telephones, and wireless communication are in their infancy, says Ron Elijah, manager of Robertson Stephens Value & Growth Fund.
BULKING UP? Because of the sector's success, all kinds of equity funds are beefing up their technology holdings. In 44 of the 50 top-returning diversified funds, tech issues make up more than 20% of the portfolio, according to Morningstar Inc. That's more than twice technology's 9% representation in the Standard & Poor's 500-stock index. Behemoth Fidelity Magellan has 32% of its $37 billion in assets in tech companies, vs. 5.7% in 1990. Other $1 billion-plus diversified funds with heavy tech holdings include Oppenheimer Main Street Income & Growth, AIM Constellation, and Twentieth Century Ultra Investors.
If tech lives up to its promise, that will be a boon to these funds. But risk-shy investors, such as those nearing retirement, should be aware that their funds may be bulking up on tech. "Most people are buying funds to be diversified and have fairly marketlike exposure," explains John Rekenthaler, editor of Morningstar Mutual Funds. "To end up with a quarter of one's assets in one sector is setting yourself up." It hasn't been a problem yet. Over the past five years, the .94 beta, which measures risk, for diversified equity funds hasn't changed, according to Morningstar. The S&P is slightly more volatile at a beta of 1.0.
Still, the advantage of owning a general fund is that the diversification tempers the rough gyrations of the tech stocks, which as a group can drop up to 10% in a month, says Harry Lange, manager of Fidelity's Select Computers, Electronics & Technology Fund. And if tech stocks head south, general-fund managers can switch assets to a less risky, more prosperous arena.
But that flexibility means that strong-stomached investors can't control their own exposure. "If you want 20% of your money in technology for the next 20 years, the only way to do that is with a tech fund," argues Glenn Fogle, manager of Twentieth Century Vista Investors, a general fund with 53% of assets in technology.
Sector-fund managers who trade exclusively in technology also know more about the industry. Paul Wick, manager of Seligman Communications & Information, says that general funds got hurt when IBM, DEC, and Wang fell in recent years. But many tech funds avoided that fate, "because the managers are much more attuned to changes in the computer market." And despite periodic free falls, tech funds have averaged an annual 16.19% gain since 1990, vs. 10.74% for general funds.
HEAD FOR CASH. Sector funds can't escape into other industries when trouble looms. But they have strategies to temper volatility. Seligman logged a 21% average annual return for 10 years by switching from media stocks in the 1980s to mostly semiconductor stocks in the '90s. T. Rowe Price Science & Technology Fund spreads the risk among six kinds of tech stocks, with no more than 5% of assets in any one company. Merrill Lynch Technology will plow up to 25% of assets into one company, take profits, and head for cash to protect its gains.
Whatever your risk tolerance, it makes sense to investigate how much and what type of technology stocks your fund holds. Look at yearend reports and prospectuses, and get familiar with some of the bigger tech names, such as Motorola, Intel, and Seagate Technology.
Technology is such a hot sector, most equity-fund investors should have exposure to it. Given its volatility, the question is: How big a dose can you stand?Pam Black