Unloved for years, tech funds back on Wall Street's radar

Monday, February 6, 2006

Drooping shares of big stocks have given fund managers a chance to snap up solid names at bargain prices.

If you were in the stock market in the late 1990s, you felt the thrill of the technology boom and probably still have the scars from the sector's collapse. But tech funds and stocks are becoming attractive once again to investing contrarians.

Last year wasn't particularly inspiring for tech funds, as they returned just 5.52 percent, barely besting the 4.9 percent gain of the Standard & Poor's 500. Longer-term data betrays the legacy of the bubble: Tech funds have lost 9.22 percent over the last five years and are up just 6.36 percent over the last decade.

But the funds have crept back since 2002, with a three-year gain of 19.73 percent, and a closer look at the sector shows better opportunities may be on the horizon.

"Tech has burned a lot of people," said Karen Dolan, an analyst at fund tracker Morningstar Inc. "It tends to be a place where people remember the way up, and the way down. But what we're seeing now is that on the stock level, there are good values in the big blue chip companies."

Drooping shares of big stocks are partly to blame for the sector's lackluster performance over the last year. But they've also given fund managers -- hoping for a long-anticipated uptick in corporate technology spending -- a chance to snap up solid names at bargain prices, including computer makers Dell Inc. and International Business Machines Corp., chipmaker Intel Corp., and software provider Oracle Corp.

There have been a fair number of success stories as well, some flashier than others. Google Inc., a stock that didn't exist two years ago, is now one of the most widely held issues. The 99 tech funds in Morningstar's database have, on average, about 2.47 percent of their holdings in Google, and it is among the top five stocks of many portfolios. Apple Computer Inc. has also been a huge winner, as has flash memory maker SanDisk Corp. and Corning Inc., which has enjoyed tremendous profits as one of the leading makers of the super-thin glass used in flat panel TV screens.

"It's been a sector with mixed results," Dolan said. "If you have a tech fund manager who is a good stock picker, and who has proven to be good at picking out values when they're there, and also being able to see growth as it starts to happen, investors could be well off."

One thing worth noting is how managers evaluate tech stocks now, compared to the way they did during the go-go years. The biggest difference? Fundamentals matter. And while the growth of the sector may be lower than it was in the late 1990s, it's also more mature, and potentially more durable and widespread, said James Morrow, manager of the Fidelity Select Technology fund.

"The tech market was a speculators' market back then. It was a difficult environment to invest in," Morrow said. "Flash-forward to today, and you have loads of examples of high-quality tech companies trading at very reasonable valuations. ... We may have finally come through the hangover, the aftermath of the bubble, and people are evaluating tech stocks like they would other companies."

Now, instead of "counting eyeballs" -- one way Internet companies were valued during the boom -- managers focus on factors such as cash flow, the health of operations and whether a company's business model is sustainable, said Vivienne Hsu, a senior portfolio manager with the no-load Schwab Technology fund (SWTFX), offered by Charles Schwab Investment Management.

"Things are more stable, reasonable and rational now. We're seeing opportunities for the right reasons," Hsu said. "Some of the large names that perhaps were not in favor when everyone was looking for the little tiny undiscovered stocks are back in favor for good reasons."

If you were singed in the bust and leaped out of the tech sector at the market bottom, you missed the beginning of the rally that started so quietly back in 2002. Whether you decide to up your tech holdings now depends largely on your appetite for risk, and the amount of exposure you already have; it might be more than you think if you own a large-growth fund. If you're an indexer, keep in mind that tech is the second-biggest sector in the S&P 500, with a weighting of more than 18 percent; only the financial sector is bigger.

Tech remains more volatile and cyclical than the broader economy. The reward, though, is that it is likely to grow faster. For most investors, broader offerings make more sense than those focused narrowly on industries within the sector. Funds that invest solely in semiconductors, software, networkers, equipment makers or internet stocks will have little place to hide if there is a downturn in any of these areas -- a lesson learned the hard way after the bull market ended.

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