S&P has an overweight recommendation on the tech sector and finds top holdings in a couple of best-performing funds
Technology stocks proved to be a good holding in 2007. Tech stocks in the S&P 500-stock index put up an average gain of 15.5% last year, compared with a 3.5% gain for the 500 as a whole. And what will 2008 bring? So far, it has not been a good year for tech stocks. In the first four months of 2008, tech stocks lost almost 7%, though January and February were far worse than March and April.
Standard & Poor's Equity Strategy advises an overweight allocation to the tech sector. "We think 2008 enterprise spending growth will decelerate, owing to, in our view, relatively lean budgets and potential productivity benefits," says Alec Young, S&P's equity strategist. "However, we do not think this deceleration will be significant." Accordingly, S&P recommends large caps that it views as having notable non-U.S. exposure, strong balance sheets, and attractive valuations.
Crunching the numbers, Young notes the technology sector is projected to post a 17.4% increase in 2008 profits vs. an 8.3% advance seen for companies in the S&P 500.
Columbia Technology Among the Top Five
As of May 20, the IT sector passed financials as the largest sector within the S&P 500. Information technology now represents 16.26% of the S&P 500 market value, overtaking the financials, which are at 16.19%, an event last seen in early 2002, says Howard Silverblatt, S&P's senior index analyst. S&P Equity Strategy advises a 17.3% allocation to technology.
The technology sector is often more volatile than other sectors. However, the best technology mutual fund portfolio managers likely know how to navigate their market.
For example, Columbia Technology fund (CTCAX) shows up as a top-five performer for both three-year and five-year periods. Portfolio manager Wayne Collette looks for technology opportunities throughout the world as well as throughout the large-, mid-, and small-cap space.
The top holding in the fund—as of the end of March (the most recent period for which this information is available)—is Nokia (NOK). Other top holdings include Qualcomm (QCOM) and Nintendo (NTDOF.PK). Overall, the average market cap for a holding in this fund is $14.6 billion vs. $20.2 billion for technology sector mutual fund peers.
Tech Sector Funds Beating the Average
Likewise, Berkshire Focus fund (BFOCX) is a top-five performer for both one-year and three-year periods. This concentrated fund has only 25 to 30 holdings at any one time, with the majority of them in the technology sector.
Like Columbia's Collette, Berkshire Focus fund's portfolio manager, Malcolm Fobes, searches for opportunities regardless of capitalization or country of domicile. The top three stock holdings in the fund, as of the end of March, are Apple (AAPL), Research in Motion (RIMM), and Google (GOOG).
Other technology sector funds that have beaten the group's average total return over the last one-, three- and five-year periods (through Apr. 30, 2008) include Matthews Asian Tech (MATFX), Allianz RCM Tech (RAGTX), Turner New Enterprise (TBTBX), and Waddell & Reed Advisors Science & Technology (UNSCX). To see how they stack up, check BusinessWeek.com's Mutual Fund Scoreboard.