A Tech Fund in Disguise May Be Lurking in Your Portfolio

If you're looking for a tech fund these days, you might be surprised to find one in your portfolio -- even if it doesn't have "tech" in its name.

Today the average "diversified" growth fund has more than 40 cents of every dollar sunk into tech stocks, according to Morningstar data. Given the outsize returns tech stocks have posted over the past few years -- the average tech fund shot up 135% last year -- you might have already assumed tech stocks are playing a big role in growth funds these days.

Growth in Technology Growth funds of all sizes have big yen for tech.
Large-Cap Growth Funds	Mid-Cap Growth Funds	Small-Cap Growth Funds	S&P 500
44.2%	48.1%	44.4%	29.9%
Source: Moringstar. Data through June 30.

The average growth fund's tech weighting is more than 10 percentage points higher than the S&P 500's tech weighting. Observers say this outsize sector bet by nonsector funds is the biggest in recent memory. The result: Investors who don't know how exposed they are to technology may get a jolt if the sector swings violently.

"I haven't seen [a sector bet] to this degree. I don't think any sector has approached this level," says Morningstar's Russ Kinnel. "You can make much bigger mistakes now than you could have 10 years ago."

Despite this year's volatility in the tech sector, managers apparently still believe that's where growth will come from. At the end of last year the average growth fund had less than 37% of its assets in tech, so it looks like growth managers have been ramping up their exposure over the past six months.

The tech leanings of "diversified" funds were born of the tech revolution and tech stocks' stunning performance over the past few years. The average tech fund has posted a return above 20% in four of the last five calendar years. To stay competitive, diversified funds have added heaping helpings of tech to their portfolios. Even value funds, which tend to focus on lower-octane sectors such as financials, have more than 12% of their assets in tech stocks on average, according to Morningstar.

"I think there are a lot of mislabeled funds out there that should be labeled tech," says Kinnel.

Some 315 U.S. stock funds -- excluding tech funds -- have at least half of their assets invested in tech stocks. Here are the 10 funds without tech labels that have the highest tech weightings.

Tech Fund By Any Other Name? If you own these growth funds right now, you pretty much own a tech fund.
Tech-Heavy Fund	Percentage of Assets in Tech	YTD Return
(IPSFX Quote)IPS New Frontier	98.2%	-19.3%
(MGFQX Quote)Millennium Growth	97.9	-14.1
(TTOPX Quote)Turner Top 20	95.1	24.3
(POGSX Quote)Pin Oak Aggressive Growth	95.1	35.3
(MGIQX Quote)Millennium Growth & Income	93.1	-21.2
(PBHEX Quote)PBHG Select Equity	92.5	28.4
(GPFFX Quote)Grand Prix	88.7	-2.6
(PBNOX Quote)PBHG New Opportunities	88.4	-6.4
(RILCX Quote)Riggs Large Cap Growth	85.8	20.1
(PSKBX Quote)Phoenix-Engemann Aggressive Growth	83.6	9.4
Average U.S. Stock Fund	27.9	4.7
Source: Morningstar. Holdings as of most recent public portfolio report and may have changed. Returns through Aug. 13.

Despite the prevalence of tech exposure in most of their growth funds, many investors still appear to be tech-hungry, perhaps because they don't realize how much tech their growth funds already own.

"People are likely to be confused. If you bought a bunch of funds based on outperformance over a year or two, all may have outperformed because they had a bigger tech weighting," Kinnel says.

Through the first six months of this year, more than $38 billion flowed into tech funds, according to Boston fund consultancy Financial Research. That's after more than $33 billion flowed into tech funds in 1999. The previous calendar year record was $4.4 billion, set back in 1995. In a race to capture those dollars fund companies have more than doubled the number of tech funds in the past 12 months, raising the total above 105.

With flows to tech funds increasing and many diversified funds looking more and more like tech funds, the obvious risk is that some unwitting investors stand to see their portfolio's value tumble 20% to 30% in a quarter as the volatile sector goes through its occasional and sometimes sharp downdrafts.

The situation highlights perhaps the most tired saw in investing: Know what you own. While fund companies are often secretive about what stocks their funds own, a modicum of online research or a phone call to your fund companies can give you a good idea of what sectors they favor. That way you can be in a better position to buy a few distinct funds, not the same fund a few times.