The Streak Is Over: What the End of Tech Funds' 15-Year Run Means

 

If you own a tech fund, you're facing what we'll call the Cal Ripken conundrum: The Streak is over and now you've got to decide if you want to keep playing.

Ripken set a major league record by not missing a game for the Baltimore Orioles from May 30, 1982, until Sept. 20, 1998 -- a stunning 2,216 straight starts. Tech funds have an impressive and less heralded record of their own that's about to go in the books -- the category's average return hasn't been negative in any calendar year since 1984.

Cal Ripken

With tech funds' streak apparently coming to an end -- they're down more than 20% on average this year -- and many pros seeing more clouds on tech's horizon, you're left to decide to what degree you want to keep riding tech, still considered the market's Iron Horse. Tech stocks make up about 27% of the market -- using either the S&P 500 or the Wilshire 5000 indices as a guide. So, assuming you're a long-term investor, you've got to decide whether you need a higher or lower tech weighting in your portfolio.

For most investors, a market weighting is probably just fine. But to make that call, let's look first at where tech funds have been, then think about where they might be going. In the rear-view mirror, we've got The Streak, which is pretty amazing.

The Streak
The average tech fund didn't have a down year from 1985 through this year.
Source: Morningstar. Performance figures through Nov. 13.

To put this in perspective, no other stock-fund category managed to post positive returns each year in the 1990s, let alone half the 1980s, too. All told, from 1980 through 1999 tech funds only had two down years, 1984 and 1981. Consider that $10,000 invested in the average tech fund 10 years ago would be worth more than $160,000 through Oct. 31, according to Morningstar. The same investment in the (VFINX)Vanguard 500 Index fund would be worth a bit less than $52,000.

A Decade of Tech
Tech funds' tough year comes after a phenomenal 10-year run.
Source: Morningstar. Performance figures through Nov. 13.

There have been plenty of bumps along the way -- the average tech fund lost more than 20% in August 1998 -- but each time the funds managed to be in the black at the end of the year. Among the top-10 U.S. stock funds over the last 10 years, seven are tech funds, with (FSELX)Fidelity Select Electronics, (FSPTX)Fidelity Select Technology, and (FDCPX)Fidelity Select Computers leading the way.

Top 10, By 10
Of the top 10 funds over the last 10 years, seven are tech funds and two are telecommunications funds.
Fund 10-Yr. Annualized Return YTD Return
(FSELX)Fidelity Select Electronics 40.2% -6.1%
(FSPTX)Fidelity Select Technology 35.8% -16.9
(FDCPX)Fidelity Select Computers 35.6 -14.8
(FTCHX)Invesco Technology 35.1 -6.8
(FSCSX)Fidelity Select Software and Computer Services 34.4 -6.8
(FSDCX)Fidelity Select Developing Communications 33.7 -14.7
(ALTFX)Alliance Technology 32.5 -16.6
(PRSCX)T. Rowe Price Science & Technology 31.2 -25
(SLMCX)Seligman Communications & Information 30.7 -29.6
(VWEGX)Van Kampen Emerging Growth 30.7 -5.5
S&P500 18.1 -8
Source: Morningstar. Performance figures through Nov. 13.

So, there's tech funds' tale of love and glory. But what about next year, and the year after? There are some ominous omens out there.

In a slowing economy, companies and consumers tend to spend less money on lots of stuff, including technology. This could take a bite out of tech shops' earnings, and it's this issue that has knocked many tech stocks down from lofty valuations.

Today the tech-laden Nasdaq Composite is down 27.1% for the year and 41.2% since its March 10 peak. More speculative stocks have been hit even harder, illustrated by the 56.9% hit the TheStreet.com Internet Index has taken this year. Let's not even talk about the Net funds' bloodbath.

Fidelity fund managers -- some of the savviest tech investors out there -- have lightened up on tech almost across the board. Bob Stansky, influential manager of the $101.6 billion (FMAGX)Fidelity Magellan fund, reduced the fund's tech-stock weighting from 35% down to 29% between March 31 and Sept. 30, according to the fund's semiannual report filed with regulators on Monday.

In the report, Stansky forecasted "a slowdown of some magnitude in the economy" and "a broad slowing of corporate earnings growth."

In anticipation of a potential slowdown, Stansky and other managers are dumping Old Tech stocks -- those relying on maturing PC sales -- in favor of New Tech stocks -- those with tighter ties to the Internet and communications networks. This intratech rotation is roiling the tech sector these days with money flowing out of Microsoft(MSFT), in favor of data storage shops like EMC(EMC), Net software companies like Oracle(ORCL), and hot-shot networkers like JDS Uniphase(JDSU) and Juniper Networks(JNPR).

While firms like these have rosier growth estimates, they won't be immune from a slowdown. Since many still trade at steep valuations, they're far from a safe harbor. Then again, where else are you going to go?

If the tech sector's volatility this year has left you rattled, you might want to stand pat or reduce your tech stake by investing new cash in less tech-heavy funds or by selling shares of tech-heavy funds -- though be mindful of realizing taxable cap gains.

Even if you're still a bona fide tech bull -- if you are, you're hardly alone -- you should check out exactly how much tech exposure you already have before you shop for more. After all, the average growth fund has more than 40% of its assets sunk into the sagging tech sector these days, according to Morningstar.

If you still want more tech, go ahead. But buyer beware: Many of the tech funds out there today didn't contribute to The Streak. There are some 115 stock funds, and only 18 were launched prior to 1995. More troubling is the fact that many of the latest tech funds slice the sector into fairly thin slivers to stand out in a crowded market: B2B e-commerce funds, Asian tech funds, networking funds, wireless funds and even a socially responsible tech fund. A broader tech fund is probably the best choice.

The Streakers
These are the four tech funds that posted positive returns each year throughout the 1990s. Their streaks are all in dire straits this year.
Fund 10-Year Annualized Return YTD Return
(FSELX)Fidelity Select Electronics 40.2% -6.1%
(FSPTX)Fidelity Select Technology 35.8 -16.9
(FTCHX)Invesco Technology 35.1 -6.8
(FSCSX)Fidelity Select Software and Computer Services 34.4 -6.8
Source: Morningstar. Annualized performance figures through Nov. 13.

Of all the tech funds on the shelf, only four posted positive returns each year in the 1990s. And of these four funds, none has a manager who's held the reins for three years. Here are some new tech funds with veteran managers.

A Geyser
Tech Funds Launched
Pre-1995
Tech Funds Launched
Post-1995
18 97
Source: Morningstar. Data through Oct. 31.

No matter which route you pick, it's a tough choice. Overweighting or underweighting the sector will make you a hero or a goat. Keeping your weighting even with the market might ensure a degree of mediocrity, but it keeps you in the game, probably with fewer regrets.


Here's Cal Ripken's section of the Baltimore Orioles' fairly underwhelming Web site.

>To order reprints of this article, click here: Reprints

TheStreet Premium Services    For Personal Service: 877-471-2967

Jim Cramer
Jim Cramer's Action Alerts PLUS:
Trade right alongside a Wall Street pro — enjoy access to his Charitable Trust portfolio and be sent trade alerts BEFORE he makes a move. Learn More
New: ETF Profits
ETF Profits:
Get money-making ideas from the hottest investment vehicle on the planet. Our experts show you how to play various ETF sectors to help pump-up your portfolio. Learn More
OptionsProfits
OptionsProfits:
Get 50+ trade ideas a week from the industry's top options experts. Plus — exclusive commentary on market trends and essential trading tools. Learn More
Doug Kass
Real Money:
Our team of professional Wall Street Pros — including Jim Cramer, Doug Kass, and Nicholas Vardy — delivers intelligent analysis, timely trade ideas, and colorful commentary. Learn More
Stocks Under $10
Stocks Under $10:
Break into the market with small- and mid-cap stocks... all $10 or less! David Peltier tells you exactly which low-priced stocks he's buying and selling. Learn More
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
blog comments powered by Disqus
Dow Jones S&P 500 NASDAQ 10-Year Note
12,890.46 1,351.95 2,927.23 20.47
Oil *
118.75
UP
6.51
UP
1.99
UP
11.37
UP
0.72
10 Yr
2.05%
SPDR Gold
168.02
+0.05%
+0.15%
+0.39%
+3.65%
Data delayed 20 minutes

Top Stories and Tools

Brokerage Partners

After the Bell

Before the Bell

Booyah! Newsletter

ETF Daily

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

We respect your privacy.
Podcasts

Connect with TheStreet