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Investing Specialists

Smart Plays in the Tech Sector

How American Funds' growth offerings have navigated technology.

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American Funds' two growth funds,  AMCAP (AMCPX) and  Growth Fund of America (AGTHX), have had a roaring year so far in 2009, owing partly to their heavy technology weightings. On the surface, it hardly seems unusual that growth funds would have technology exposure, but these funds' timing, stemming, we think, from their valuation discipline, has been particularly good.

Recently, we compared how much technology exposure American's two growth funds have now to what they had in their March 31, 2000, portfolios. We found that the funds' technology exposure reflects American portfolio counselors' contrarian style and caution regarding valuation. Basically, the funds have more technology stocks among their top holdings than they did in the late 1990s, and that's been a boon to shareholders both in the market meltdown from 2000 through 2002 and in the early part of 2009.

How AMCAP and Growth Fund Were Positioned for the Tech Meltdown
In the early 2000s' bear market, which ran from March 1, 2000, through Oct. 31, 2002, AMCAP lost 18%, while GFA lost 35%. While these are painful losses, the S&P 500 Index lost 33%, the Russell 1000 Growth Index declined 55%, and the typical large-growth fund was down 51% during that period. American's growth funds held up quite well in relative terms during the technology meltdown, because the funds didn't gorge on technology stocks when they were richly priced.

John Coumarianos has a position in the following securities mentioned above: MSFT, TXN. Find out about Morningstar’s editorial policies.