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Talking Points: December 2010/January 2011

Is it time to hop on the commodities bandwagon?

Morningstar Analysts, 12/13/2010

What Morningstar's analysts are hearing from mutual fund managers about tech..

The Issues
What Morningstar's analysts are hearing from mutual fund managers about technology.

The Issues
Large-cap portfolio managers are buzzing about technology. Leaders of tech companies are wiser today than they were in the dot-com era, fund managers say. They're conserving cash, limiting debt, and making smarter acquisitions. On average, tech-stock valuations are attractive after a decade of weak returns. The typical tech-stock fund lost 5% annualized during the past decade, while the S&P 500 was flat.

Apple AAPL has commanded attention. It's owned by most large-blend and large-growth funds and has been a market darling for at least the past five years. Portfolio managers like its growth, innovation, and loyal customer base; the only real debate swirls around its valuation. More large-cap value, blend, and growth funds own Microsoft MSFT, but there's much debate around it. Can it compete? Does it have to at its current valuation?

IBM IBM has been lauded for transforming itself from a hardware company to a services firm and for buying back shares, which boosts the firm's earnings per share. Will others follow suit? Google GOOG has managers scratching their heads. Its shares dropped more than 25% through August. Some have taken notice, and the stock has recovered ground.

 The Points
* For the most part, American Funds is in character. Although Apple remains a popular holding at the family, most of the funds have been trimming it. On the flip side, they've been adding to Google, one of the tech sector's harder-hit stocks. There's less of a consensus on Microsoft, however. Several funds, including New Economy ANEFX and Growth Fund of America AGTHX, have pared their Microsoft stakes, while Investment Company of America AIVSX and Capital World Growth & Income CWGIX have boosted their holdings. The latter two consider income: Microsoft has increased its dividend during the past five years and currently boasts a dividend yield more than 60% greater than its industry average.

* T. Rowe Price Growth Stock PRGFX recently sold Microsoft. Manager Rob Bartolo says that it was a legacy holding from when he took over the fund three years ago. Bartolo is disappointed with Microsoft's lack of innovation, but T. Rowe's tech analyst still likes it and thinks it can grow, so it's held in other T. Rowe portfolios.

* Jeff Constantino, who runs MFS Massachusetts Investors Growth Stock MIGFX, says that others in tech ought to emulate IBM, saying that the firm is one of the tech rarities that has a "solid record of wealth creation." Constantino likes its sustainability and the fact that it isn't in tech's "sexiest areas where others throw money" merely for the sake of growth. Among tech, IBM provides ballast to a portfolio. Legg Mason's Bill Miller agrees, adding that it's still one of the market's best values, despite trading near its 52-week high.

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