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Tech Stock Rally Leaves Some Funds Behind

Plus, Vanguard says 401(k) investors stayed the course in 2008, Macquarie Group buys Delaware Investments, more leveraged ETF warnings, and more.

Morningstar Analysts, 08/24/2009

Morningstar's fund analysts cover 2,000 mutual funds. Their full analyst reports, including Stewardship Grades, are available in Morningstar Principia Mutual Funds Advanced and Morningstar Advisor Workstation Office Edition.

The rising tide has not lifted all tech funds.

Technology stock funds have led the domestic-equity pack in 2009. The average tech fund was up 37.6% for the year through Aug. 19. The top mutual fund in the category, Fidelity Select Electronics FSELX, is up a massive 55.5% over that same time period. (In all, there are nine tech funds with returns topping 50% for the year to date.) Managers we've spoken with recently report that tech companies' earnings have been better than expected, and that these firms are better equipped to navigate the recession because many of them have been through the tech bust in 2000. Even so, there are funds that haven't benefited as much from the category's current hot streak.

The category's bottom three performers for the year so far have been ICON Information Technology ICTEX, up 23.8%; Ivy Science & Technology WSTCX, up 22.74%; and Firsthand Technology Value TVFQX, up 12.73%

These are good absolute gains, but these funds are lagging their peers. Top-performer Fidelity Select Electronics has about 25 holdings with stocks that have more than doubled for the year to date. Icon Information has only three. Ivy Science & Technology has more stocks that have doubled this year than Icon has, but it also has a chunk of holdings that are down more than 20%, including non-tech firms like biotech company Genzyme GENZ and oil services provider ION Geophysical Corporation IO. It's hard to tell what's happening at the worst-performer of the bunch, Firsthand Technology Value. As Morningstar has pointed out before, the portfolio is filled with private start-up companies that aren't traded publicly and are difficult to sell, making this fund too risky under any conditions.

401(k) Investors Hold Steady
The investing hoi polloi get a lot of grief for being unsophisticated and fickle, but more evidence emerged this week that most of them may be more long-term focused than many purported experts believe. A study published by Vanguard found that most of the participants in its 401(k) plans continued to invest during the crash of 2008 and early 2009, didn't back away from equities, and avoided the urge to actively trade despite the volatile market. Vanguard examined the actions of more than 3 million participants in the 2,200-plus defined contribution plans the family administers. The study showed that only 16% of participants traded during 2008. Of that, only 2% abandoned equities and the remaining 14% made a variety of other portfolio changes. A few other interesting tidbits: 

  • Target-date investing is on the rise: 37% of participants with access to target-date funds invest in them; 46% of participants who own target-date funds have 100% of their account in a single target-date fund; and 13% of all Vanguard participants are wholly invested in a single target-date fund.
  • Although the majority of participants continue to have sensible equity stakes, one third of participants went to the extreme last year, holding either 100% in equities or less than 20% in equities. Vanguard's research suggests that target-date investors are less likely to make such extreme allocations.

Macquarie Group Buys Delaware Investments
Lincoln Financial Group LNC announced on Wednesday that it will sell its Delaware Investments subsidiary to Macquarie Group, an asset manager based in Sydney, Australia. Macquarie will pay $428 million in cash for the business. According to the announcement, the firms don't expect any changes to Delaware's investment teams and processes. Delaware will remain headquartered in Philadelphia, and the current management team will continue to run the firm. The sale will permit Lincoln Financial Group to focus on what it sees as its core businesses--insurance and retirement services--and will enable Macquarie to expand its global reach. The addition of Delaware's $125 billion in assets under management will increase Macquarie's assets under management to more than $300 billion. The firms expect the deal to close by the end of the year. 

Regulators Issue Leveraged and Inverse ETF Warnings
On Tuesday, the SEC and FINRA issued a joint alert warning investors of the risks of leveraged and inverse ETFs. The notice calls attention to potential confusion on the part of investors about the performance objectives of these ETFs: They are not intended to be long-term investments. They are designed to deliver a multiple of the index they track on a daily basis and their performance over the long term can vary greatly from the ETFs' daily performance. As we discussed earlier this year and most recently in June, most individual investors should avoid leveraged and inverse ETFs.

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