Funds succeed by bailing out of tech sector

Those specializing in Internet, emerging tech get hammered

Dollars & Sense

August 11, 2002|By Christopher J. Traulsen | Christopher J. Traulsen,MORNINGSTAR.COM

The technology sector has been a disaster this year. From software to telecommunications equipment, few areas have escaped the market's plunge.

Even semiconductor stocks, one of the technology sector's stronger areas earlier in the year, have dropped sharply in the past few months, with networking chip-makers such as Vitesse Semiconductor VTSS recently getting pummeled. (Vitesse missed earnings on July 18, triggering a round of downgrades from ever-prescient Wall Street analysts.)

On the whole, the funds that have fared better than the norm have done so by investing outside the tech sector or by going overseas. Kinetics Internet WWWFX, one of this year's better-performing tech funds, had 29 percent of its assets in cash and 19 percent of its equity portfolio in the tech sector as of March 31.

Seligman Global Technology Fund SHGTX is relatively fully invested, but recently it had nearly half of its assets in non-U.S. companies, including a 35 percent stake in Asia, one of the strongest regions this year.

Chips, despite their recent downturn, have generally fared better than have other areas this year, leaving funds such as Fidelity Select Electronics FSELX in decent shape relative to their peers.

The worst-performing funds read like a who's who of the usual suspects. A stack of Internet funds and emerging tech funds including Black Oak Emerging Technologies BOGSX, RS Internet Age RIAFX, Van Wagoner Technology VWTKX, and Munder NetNet MNNAX have been absolutely hammered as investors have fled anything with a whiff of uncertainty about it.

Given the wreckage in the sector, our three analyst picks have held up reasonably well. Fidelity Select Technology FSPTX, Northern Technology NTCHX and Pimco RCM Global Technology DRGTX all sit within or near the category's top third for the year:

Fidelity Select Technology FSPTX. This fund has changed managers often recently, but we're not overly concerned. Fidelity's considerable research muscle typically mutes the effect of such changes. The fund's large size means that it's not terribly nimble, so it tends not to fare well when industry leadership rotates quickly.

However, it provides broad exposure to the tech sector, and its long-term results are sturdy. Current manage Sonu Kalra, who took the helm in February, has acquitted himself reasonably well. The fund is down 35 percent for the year to date, but 75 percent of its peers have fallen even further in the period.

Northern Technology NTCHX. Managers John Leo and George Gilbert are willing to make sizable subsector bets but have generally been on the mark. The fund's five-year return, though barely in the black, is in the top quintile of technology funds for that period.

Most recently, the managers have favored consumer-oriented companies such as Electronic Arts ERTS, eBay EBAY, Intuit INTU and Apple Computer AAPL. The relative strength of these holdings, along with that of large positions such as Dell Computer DELL, Motorola MOT, and Texas Instruments TXN, has helped the fund lose less than two-thirds of its peers this year.

PIMCO RCM Global Technology Instl DRGTX. This fund remains one of our favorites in the tech sector. Co-managers Huachen Chen and Walter Price have run money in this style together for more than a decade, and they've been very successful here since this fund's launch in late 1995.

The two spread the fund's assets across emerging names, established blue chips and value plays, and generally keep the fund reasonably well-diversified across subsectors and market-cap bands. The fund is down 38 percent this year, but nearly two-thirds of its peers have lost even more. Picks such as Dell Computer DELL, top-holding eBay EBAY, and Taiwan Semiconductor TSMWF have helped it hold up reasonably well relative to its rivals.

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