The Big Screen: The Kings of the Tech Fund Trash Heap

This is the worst year ever for tech funds, so in a way it's the best time to look at them -- in part for morbid curiosity, in part to look for a buying opportunity.

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Not long ago these mercurial types were the fund world's stars. Riding a crescendo of buying, the average tech fund rang up a 136% gain in 1999. It was the 15th-straight year that the average tech fund finished in the black and investors bought shares hand over fist. In 1999 and 2000, a cumulative $77 billion flowed into the funds, according to Boston fund consultancy Financial Research. For comparison, the previous two-year record for cash flows to tech funds was almost $7 billion set in 1995 and 1996.

Unfortunately, all of that money showed up just in time for a beating of historic proportions. Frothy valuations, a sagging economy and falling earnings crushed tech stocks and funds.

The tech-laden Nasdaq Composite is down more than 60% from its peak on March 10, 2000. Consequently, the average tech fund is down 61.4% over the past 12 months and has lost nearly a third of its value already this year, according to Morningstar.

Tech Dreck Tech's outsize gains have given way to outside losses.

Source: Morningstar. Annualized performance figures through March 16.

Despite all this misery, there is a silver lining. Now we can look at the worst-case-scenario survivors: The tech funds that fared best over the past year and the stocks that put them on top of the trash heap. They might not be pretty, but if you're looking for a tech fund, there might be one or two on this list to consider. (If you're looking for a more traditional screen that sifts for funds with solid long-term returns and steady management, check out this story.)

Today the Big Screen is keeping it simple by just looking at the top-10 tech funds over the past year, according to Morningstar. Let's pick through these funds and then look at what stocks helped them lose less than their more-vanquished peers.

The Least Ravaged Tech Funds These funds have held up as well as any tech fund could in the past year. It appears shorting the Internet was the sweet spot
Fund	1-Year Return
Potomac Internet/Short	201.5%
(WWNPX Quote)Kinetics Internet New Paradigm	-1.5
(ICTEX Quote)Icon Information Technology	-19.1
(LUXRX Quote)Light Revolution	-39.4
(PPTIX Quote)North Track PSE Tech 100	-41.2
(STECX Quote)STI Classic E-Commerce Opportunity	-43.8
(UNSCX Quote)Waddell & Reed Advisor Science & Technology	-44.3
Evergreen Technology	-46.4
(FSCSX Quote)Fidelity Select Software & Computers	-49.3
(SLMCX Quote)Seligman Communications & Information	-50.3
Avg. Technology fund	-61.4
S&P 500	-20.2
Source: Morningstar. Annualized performance figures through March 19.

Looking at most of these funds' recent returns or losses, you might be wondering why you should bother looking at them. But the numbers show that over the long term, when used modestly in a diversified portfolio, they can make sense for your portfolio. Most asset allocation models suggest limiting your sector-fund exposure to 10% or less of your portfolio. And a portfolio with 10% of its money in the average tech fund and the rest of its money in the (VFINX Quote)Vanguard 500 Index fund, which tracks the broad S&P 500 Index, would have beaten the Vanguard fund over the past three-, five- and 10-year periods, according to Morningstar.

What a Little More Tech Would Do

Source: Morningstar Principia. Annualized returns through Jan. 31.

As you might imagine, some of the funds got on to our list because they chart a pretty distinct course compared to their peers.

The no-load Potomac Internet/Short fund, for instance, is a bit of an oddball. Most funds buy stocks in companies they like, thinking they'll profit as the company prospers and its share price rises. But this fund rang up that stunning 201% gain by shorting Net stocks, or betting that they'll go down.

There's also the broker-sold (PPTIX Quote)North Track PSE Tech 100 fund, which tracks the somewhat unconventional PSE Tech 100 Index. The Index is weighted by a stock's price, not by companies' market capitalization. So stocks like biotech shop Genentech(DNA Quote) and graphic design software shop Adobe Systems(ADBE Quote) get a bigger weighting than tech titans like Cisco Systems(CSCO Quote) or Sun Microsystems(SUNW Quote).

In running the no-load (ICTEX Quote)Icon Information Technology fund, lead manager Craig Callahan and his colleagues use quantitative screens to rotate among a dozen tech subsectors. The goal is to find stocks of companies that might be undervalued relative to their peers.

While the fund's price-conscious approach led to a below-average return in 1999, it still rose 111% that year, which is tough to ignore. The fund actually made money last year and its 38.2% three-year annualized return beats 98% of its peers, according to Morningstar. One thing to keep in mind is that its definition of "tech" appears broader than Morningstar's. At the end of last year the fund only had 35% of its money in "tech" stocks, according to the Chicago fund tracker.

Two more traditional tech funds on our list are the broker-sold (SLMCX Quote)Seligman Communications & Information fund and the (FSCSX Quote)Fidelity Select Software & Computers fund, which levies a maximum 3% front-end sales charge, or load.

Paul Wick has run the Seligman fund since 1990, and his approach tends to be more price-conscious than the approach of many of his peers'. That has held the fund back in frothy times: It lagged its peers in 1998 and 1999. But if you're looking for a less-bumpy ride, it might be worth a look -- it's been less volatile than its peers over the past three years, according to Morningstar.

And its returns haven't been skimpy either. The fund's 22.2% annualized return over the past 10 years is about even with the category average, and its stark 50% loss over the past 12 months beats more than 90% of its peers.

Like most of Fidelity's sector-specific Select funds, the Software & Computers fund zeroes in on a subsector and changes managers frequently as different analysts get experience running a fund. A better choice for many investors might be the more diversified (FSPTX Quote)Fidelity Select Technology fund, which is about even with its peers over the past 12 months and beats at least 70% of its competitors over the past three-, five- and 10-year periods.

These funds have above-average manager turnover, which might turn you off, but the Boston behemoth's deep bench of analysts usually leads to solid results.

The list of stocks that propelled this eclectic mix of funds on to our list is littered with giant, well-known shops. We tossed these funds' portfolios into a pot and fished out a cumulative top-10 holdings. Instead of highflying emerging networkers -- a staple among leading tech funds in past screens -- we find biggies like server king Sun Microsystems, Net/media maven AOL Time Warner(AOL Quote) and software giants Oracle(ORCL Quote) and Microsoft(MSFT Quote).

Under the Hood The stocks with the biggest weighting in the combined portfolios of the 10 funds listed above
Stock	Weighting in Top-10 Funds	Number of Top-10 Funds Owning the Stock
Sun Microsystems(SUNW Quote)	1.7%	5
Oracle(ORCL Quote)	1.6	5
Tellabs(TLAB Quote)	1.1	3
Adobe Systems(ADBE Quote)	1.1	3
EMC(EMC Quote)	1	4
Concord EFS(CEFT Quote)	1	3
Veritas Software(VRTS Quote)	1	2
America Online Time Warner(AOL Quote)	0.9	5
Microsoft(MSFT Quote)	0.9	7
Micron Technology(MU Quote)	0.8	6
Source: Morningstar. Holdings as of funds' most recent portfolio reports.