Investors are still smarting from the bursting of the tech bubble in 2000, but wariness needn't become a phobia. There are plenty of strategies for placing diversified bets to reduce high anxiety. Start with a good tech-oriented mutual fund with a savvy manager, low fees, and a long-term track record. Brian Portnoy, a mutual-fund analyst at Morningstar Inc., recommends Northern Technology Fund (NTCHX), which boasts a 9.58% average annual return since its inception in 1996.
For investors who may be warming up to tech but are not quite ready to go whole hog, Portnoy suggests buying a "stealth" tech fund -- a growth fund run by a manager well-versed in the industry. One of his favorites is the Fidelity Capital Appreciation Fund (FDCAX) run by Harry Lange, a former tech-sector analyst for Fidelity Investments. Lange deftly anticipated the current rally, raising his fund's exposure to tech from 21% to 41%, delivering a 25% return so far this year.
Another approach is to consider funds with a broad definition of technology. While many managers are constrained by narrow investment charters, Paul H. Wick, who has run the Seligman Communications & Information Fund (SLMCX) since 1989, can invest in health-care technology. Wick now devotes 22% of his fund to fast-growing stocks such as medical equipment maker Beckman Coulter (BEC) Inc. and Quest Diagnostics (DGX) Inc., one of the largest clinical-lab operators in the U.S. This year his fund is up about 22%.
If you want to diversify, simply buying several tech funds may be a mistake. Arnie Berman, tech strategist for SoundView Technology Group (SWDV), notes that 44% of all tech equity is now concentrated in just five stocks: Microsoft, Cisco Systems, Oracle, Dell, and IBM. To avoid owning too much of the same stocks, he suggests buying exchange-traded funds that focus on tech niches.
ETFs are baskets of stocks that trade on the major exchanges like common stocks. Among their advantages over mutual funds: They give investors control over when they take capital gains and losses, they trade continuously, and the mix of stocks in the basket is fixed. Berman recommends the iShares Goldman Sachs Networking fund (IGN) which invests in Cisco and other networking companies, or sister funds dedicated to semiconductors and software.
Sometimes a broad index fund is the simplest answer. But avoid the NASDAQ 100-Stock Index, which now has only 55% of its capitalization in tech stocks. Instead, says Howard L. Simons, a finance professor at the Illinois Institute of Technology, consider the North Track fund family's Pacific Stock Exchange Tech 100 Index fund (PPTIX) which has averaged 11.2% returns over the past five years.
For investors, the message is clear: Techphobia can be treated with simple therapies. By Dean Foust