Few mutual fund groups have been hotter during this up market than the diverse bunch known as science and technology funds.
They may be richly valued -- their average total return since the October 1990 stock market low is 62.7 percent, vs. 42.8 percent for the average general equity fund, according to Lipper Analytical Services. Still, they could be worth a look if:
* You're interested in an aggressive equity fund that could outperform the broad market, as reflected by the Standard & Poor's 500 index.
* You maintain a core position in a general equity fund so your portfolio won't be too concentrated in one sector of the economy.
* You're investing for several years and can tolerate the volatility that characterizes the group's performance.
* You'd practice dollar cost averaging -- that is, you invest a fixed amount at regular intervals instead of a lump sum all at once. Should the stock market suffer a large drop, you would have less capital at risk -- and you'd be able to pick up more shares for your money.
* You don't need income. Investing exclusively or primarily for growth, science and technology funds pay small dividends, if any.
Why take a position in a such funds? To benefit from the expected long-term growth of companies that make products or provide services depending heavily on scientific discovery and technology.
They can be in computers, health care, communications and other fields.
Even if such companies have been hurt by the recession, they will share in the recovery, meeting demand for products and services that enable businesses to operate more efficiently and enable people to enjoy better health and more conveniences.
In selecting stocks for their portfolios, fund managers must consider changes in economic conditions and the prospects for new products and services, including the possibility that they will soon be obsolete.
Given the above-average riskiness of such stocks, they should generate above-average returns for their shareholders.
No science and technology fund matched the S&P 500's average annual return of 17.3 percent for the last decade, as the table shows.
But five of the leading performers of the last five years exceeded the index's 14.7 percent average return for that period.
Even more funds have beaten the index this year. Four -- Financial Funds' Technology Portfolio, Seligman Communications and Information Fund, T. Rowe Price Science & Technology Fund and Fidelity Select Technology Portfolio -- produced returns through October that were more than twice the index's 22 percent.
How well they can keep up such relative performance depends, in large part, on the continuing success of their various strategies.
Dan Leonard, who has managed Financial Funds' technology offering for almost all of its seven years, prefers small companies that have developed new technologies. Whether making uninterruptible power sources for computers, desalination equipment (such as that used to provide fresh water for Desert BTC Storm) or a computerized dry fingerprint machine for the FBI, companies must have more than one product to get his nod.
Mr. Leonard normally holds about 40 stocks but now has positions in about 25 more. Small-company stocks can be hard to sell at acceptable prices, and he wants flexibility in case he must raise cash because of an unexpected wave of redemption requests.
Fidelity Select Telecommunications Portfolio's long-run record is
attributable to the regional Bell telephone companies that have made up a large share of its assets. As their earnings flattened in the last couple of years, these companies were underweighted.
The fund remains 50 percent committed to telephone service stocks but is increasingly invested in other companies, ranging from AT&T to small firms such as LDDS Communications, a regional long-distance carrier.
United Science and Energy Fund has to be invested in large companies such as Exxon, General Electric, General Motors, IBM, Merck and Mobil because of its size ($333 million) and its manager's interest in preserving shareholders' capital.
To boost returns, however, manager Abel Garcia looks to smaller companies. His largest holding: Amgen, a biotech firm. Second largest: Triton Energy.
For its Communications and Information Fund, Seligman seeks companies, regardless of size, that are innovative, have dominant positions in their industries and are financially strong -- companies that have shown remarkable growth despite the recession, says research director Charles W. Kadlec. Among them: Readers Digest.
Lisa Costa, co-manager of Franklin DynaTech Fund, also is indifferent to company size -- but not to long-term earnings growth (at least 15 percent per year). With only about 25 stocks in the portfolio, each one must count. The fund may hold them for years -- as long as they meet expectations. Intel, a maker of computer microprocessors, accounts for 7.5 percent of the fund's assets and has been in the portfolio since 1981.