Calculated Risk: Tech Funds That Are 'Safer' Than Their Brethren

Note to readers: Beginning this week, The Big Screen, columnist Ian McDonald's search for the best performing funds, will run Tuesdays, Thursdays and Saturdays.

If 1999's heady gains shows us that tech funds are the fund world's race cars, last year's painful losses proved that it might make sense to pick one with decent brakes.

In 1999 the average tech fund rang up a 135% return, but since the tech-laden Nasdaq Composite's peak on March 10, the average tech fund is down 50.5%, according to Morningstar. So, the first Big Screen of this uncertain year sifts the tech-fund pack, looking for a little stability.

Though plenty of investors are still smarting from 2000's tech losses, there is good reason to look at the sector. After all, the average tech fund's 27.5% annualized gain over the past 10 years and the tech revolution's momentum are enticing carrots. That said, even long-term investors probably shouldn't invest more than 5% or 10% of their assets in a tech fund, since the average diversified growth fund already has more than 40% of its money in tech stocks.

Tech Tumble The numbers tell the whole story
	Avg. Tech Fund	S&P 500
1-Year Return	-32.9%	-8.7%
3-Year Return	33.4	12.9
5-Year Return	23.6	18.3
10-Year Return	27.5	17.5
Source: Morningstar. Annualized figures through Dec. 29.

But if you're looking for a tamer type of tech fund, we've done a little homework for you. We screened the 120-fund category for funds that beat their average peer over the past one- and three-year periods, while also having below-average volatility. Eight funds made our cut, and here they are ranked by their one-year return. We're also going to check out the funds' favorite stocks, but first let's look at the funds.

Leading Tech Funds With Below-Average Volatility
Fund Name	1-Year Total Return	3-Year Total Return
(ICTEX Quote)Icon Information Technology	17.1%	48.7%
(UNSCX Quote)Waddell & Reed Advisors Science & Technology A	-13.4	41.8
(DRGTX Quote)Dresdner RCM Global Technology	-13.6	59.0
(PPTIX Quote)Principal Pres PSE Tech 1	-16.0	41.1
(FTCHX Quote)INVESCO Technology Inv	-23.9	33.8
(IFOAX Quote)MSDW Information A	-24.1	44.1
(WSTCX Quote)W&R Science & Technology	-26.1	44.5
(DTGRX Quote)Dreyfus Premier Technology	-27.4	55.5
Avg. Tech Fund	-32.9	33.4
S&P 500	-8.7	12.9
Source: Morningstar. Performance figures through Dec. 29

Clearly, there weren't many ways to hide from last year's storm. All but one of these funds lost money last year. But over the past three years, they have managed to bleed less than their peers in the category's down months.

At the top of our list, you'll find (ICTEX Quote)Icon Information Technology fund, whose broad parameters can make it less vulnerable to a tech downturn. The fund's management team can essentially hold tech and communications stocks, but also stocks of niche tech shops with financial or industrial labels. On June 30, for instance, less than half the fund's assets were in tech stocks, which probably helped keep the portfolio afloat.

The fund also had more than 16% of its assets in cash on Sept. 30, compared with 6.7% for the average tech fund, which probably helped out, too. It looks as if other funds on our list also used a fat cash stake to ride out last year's storm as well.

The sibling and broker-sold (UNSCX Quote)Waddell & Reed Advisors Science & Technology and no front-end load (WSTCX Quote)W&R Science & Technology funds each had 20% cash positions on Sept. 30. Henry Herrmann took the reins of both funds this year. He also had about 50% of their money in tech stocks on Sept. 30, stowing another 25% in health care stocks.

Those moves sheltered the funds, limiting losses to some 14% over the past three months. That beats 98% of their peers, according to Morningstar.

Two more traditional tech funds that have managed to tumble less harshly than their peers are the no-load (DRGTX Quote)Dresdner RCM Global Technology fund and the broker-sold (DTGRX Quote)Dreyfus Premier Technology fund.

In the Dresdner fund, co-managers Huachen Chen and Walter Price, who've worked together for 10 years, avoid titanic bets on a single industry, favoring broader exposure to the sector. That said, they don't leave the sector. The fund had an 85% tech-stock stake on Sept. 30, according to Morningstar. The fund beats at least 90% of its peers over the past one-, three- and five-year periods.

Despite its 27% loss over the past year, the Dreyfus Premier Technology fund looks like another case where solid stock-picking helped to stem potentially worse losses. The fund's 55% three-year annualized return beats 94% of its peers, and that 27% one-year loss actually beats some 65% of its competitors.

What stocks kept these funds at least somewhat out of the soup? The 10 stocks listed in the table below would be the faves in a combined portfolio of the nine tech funds on our list. As you can see, it's a list heavily tilted toward New Tech stocks, or those that depend more on the Internet for their growth than on maturing PC sales. While this list is interesting, these funds might not be liking these same stocks in even 12 months, given the tech sector's tendency to short product cycles and fleeting affections.

Under the Hood The stocks with the biggest weighting in the combined portfolios of the nine funds above
Stock	Weighting in Top Nine Funds	Number of Top Nine Funds Owning the Stock
Veritas Software(VRTS Quote)	1.8%	8
Sun Microsystems(SUNW Quote)	1.7	9
EMC(EMC Quote)	1.7	8
Oracle(ORCL Quote)	1.6	8
Siebel Systems(SEBL Quote)	1.6	8
Cisco Systems(CSCO Quote)	1.6	8
Juniper Networks(JNPR Quote)	1.6	7
Network Appliance(NTAP Quote)	1.4	5
BEA Systems(BEAS Quote)	1.3	6
Nortel Networks(NT Quote)	1.2	8
Source: Morningstar. Holdings as of most recent portfolio reports.