The tech category has real limitations.
It's certainly understandable if technology funds have caught your attention. They've performed relatively well as stock markets have continued to struggle in 2009. In fact, while most diversified domestic-equity and international-stock funds have lost between 10% and 15%--and some specialized offerings have dropped significantly more than that--tech funds have posted a 2% gain for the year to date through March 19. Latin America offerings are the only other category of equity funds that has managed to eke out a gain this year, and they're up just 3%.
Tech stocks definitely aren't immune to the many macroeconomic and other problems that are roiling the financial world--and they could very well struggle over the short to midterm--but there are a number of fundamental reasons to be optimistic about their long-term prospects. For starters, though they didn't suffer quite as much as energy and certain other types of issues, they did incur huge losses in 2008, and many of them are attractively priced at present. Most tech stocks are trading at roughly 12 to 13 times their prospective earnings. And while that's not quite as cheap as certain other types of stocks, it's only moderately higher than the S&P 500 Index, it's quite reasonable in absolute terms, and it's far lower than these stocks have usually traded at in the past.
What's more, many tech stocks boast strong competitive and financial positions as well as fetching prices. According to Morningstar's equity research, there are scores of software, hardware, and other computer-related stocks with both economic moats and good financial-health grades, because they have dominant market shares, copyrights, or other attributes that give them lasting advantages over their rivals plus limited leverage, healthy cash flows, and ample cash on their balance sheets. Included among that number are several of the most recognizable tech bellwethers, including IBM
Several Good Managers Are Buying Tech Stocks
As would be expected, many good technology managers have noticed that there are lots of high-quality bargains in their purviews these days. For example, Walter Price and Huachen Chen, the seasoned skippers of Allianz RCM Technology
More significantly, given that they're not confined to the technology space, many first-rate diversified-equity managers have been finding lots of opportunities in the computer-related industries. The team at Dodge & Cox Stock
Meanwhile, it's not only good diversified domestic-equity managers that have been putting a significant amount of money to work in technology stocks. The talented manager of Oppenheimer Global
But This Doesn't Make a Tech Fund Right for You
While all this might have you thinking about purchasing a dedicated technology fund, there are three reasons to be wary of doing such a thing. First, you probably already have a fair amount of technology exposure in your portfolio. Vanguard 500 Index
Second, the tech exposure that you're getting through your existing funds may well be increasing. The investors mentioned above certainly aren't the only good equity managers that have been finding lots of the opportunities in the software and hardware sectors these days. Ron Sloan of AIM Charter
Third, most technology funds have significant weaknesses themselves. Because of the explosive nature of computer-related stocks as well as their industry concentration, they're much more volatile than all other categories of funds. In fact, they suffered double-digit losses in 25 rolling three-month periods during the decade before their 2008 meltdown. In 10 of those periods they lost 25% or more.
In addition, they're costly, even by the pricey standards of specialty offerings. The median no-load fund has an expense ratio of 1.36%, and the median front-load one has an expense ratio of 1.55%. And the managers of many tech funds have only been in place for a few years and have limited experience running money in the roller-coaster conditions that prevail in the tech space.
In short, despite the many high-quality opportunities available among computer-related stocks these days, investors can comfortably do without a dedicated technology fund. Those who are set on making such an investment should be certain that they limit it to a tiny part of their portfolio, that they have a very long time horizon, and that they can handle extreme volatility.
William Samuel Rocco is a fund analyst with Morningstar.
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