I Own What?! Tech Funds Sporting Diversified Growth Duds

Imagine buying a copy of Charlotte's Web, only to find the text of Hannibal between its covers. That's the plight of poor souls who unwittingly buy shares of a closet sector fund.

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Sector funds are the fund world's home-run swing, designed to invest primarily in just one industry sector's stocks. That focused approach makes them riskier than the broader, diversified funds that typically spread your money among different sectors. Problem is, some funds placed in diversified fund categories, like large- or mid-cap growth, for instance, actually have the leeway to slug most of their money in just one or two sectors. And many use it -- potentially ratcheting your portfolio's risk way up.

Last week's I Own What?! checked out a gaggle of tech funds that invested most of their money outside of the sagging sector. Now let's check out some growth funds that live in diversified fund categories, but still have most of their money in tech stocks.

We sifted the big-, mid- and small-cap growth-fund bins, looking for the three techiest funds in each -- excluding funds with OTC in their name, those that track the tech-laden Nasdaq 100 and those with less than $50 million in assets. We turned up nine funds that have 72% of their money in tech stocks on average and have lost about 58% of their value over the past 12 months.

Tech Funds at Heart These growth funds probably deserve tech-fund labels
Large-Cap Growth Funds
Fund	Percentage of Assets in Tech	1-Year Return
(POGSX)Pin Oak Aggressive Stock	84%	-61.5%
(ROPPX)Reynolds Opportunity	72	-51.7
(FKDNX)Franklin DynaTech	72	-28.1
Avg. Peer	-30.9	-34.9
Mid-Cap Growth Funds
Fund	Percentage of Assets in Tech	1-Year Return
(VWEGX)Van Wagoner Emerging Growth	77%	-76.7%
(VWPVX)Van Wagoner Post-Venture	75	-77.5
(VWMDX)Van Wagoner Mid-Cap Growth	71	-75.1
Avg. Peer	28.8	-31.4
Small-Cap Growth Funds
Fund	Percentage of Assets in Tech	1-Year Return
(VWMCX)Van Wagoner Micro-Cap Growth	71%	-66.6%
(KOPPX)Kopp Emerging Growth	63	-57.1
(FUSSX)Fremont U.S. Small Cap	60.4	-26.8
Avg. Peer	25.2	-20.1
Source: Morningstar. Returns through Aug. 8.

We expect to find Garrett Van Wagoner's funds on a list like this. The gunslinging Silicon Valley specialist, who admitted tech stocks are "in a depression" at June's Morningstar Conference, is renowned for his tech tastes. Yes, he has a tech fund, but all of his eponymous shop's portfolios probably deserve that label these days. Firmwide, his funds had more than 92% of their money in the tech sector on June 30, according to LionShares.com, a Web site that tracks institutional stock ownership.

Jim Oelschlager, co-manager of the (POGSX)Pin Oak Aggressive Stock fund, which had an eye-popping 84% tech stake according to its most recent shareholder report, has a similar M.O. His (WOGSX)White Oak Growth Stock fund had 49% of its money in tech stocks at the end of June, and his firm, Oak Associates, offers two tech funds as well. At the end of June, the firm had 62% of its money in tech stocks, according to LionShares.com. Neither firm returned calls seeking comment.

Clearly, examples like these are extreme, but they illustrate just how dangerous it can be to buy shares of a fund based on its name, recent performance and label, without taking a close look at the fund's portfolio.

For instance, you might think the $1.4 billion (FLRFX)Invesco Blue Chip Growth fund sounds like a stable, diversified growth fund. In fact, it's anything but. The fund had a whopping 62% of its cash in tech stocks at the end of June. As you might expect, that sector bet hasn't really been a moneymaker.

The ravaged fund, run by lead manager Trent May since 1996, trails the S&P 500 and at least 90% of its peers over the past one, three, five and 10 years, according to Chicago fund-tracker Morningstar.

Indeed, the potential downside of unwittingly investing in a closet sector fund is steep. Consider that $10,000 invested at the start of last year in a portfolio of the nine funds we highlighted would've shriveled to $5,649.43.

The Price of Bets Gone Wrong Closet tech funds had a bad year compared with the S&P 500

Source: Morningstar. Returns through June 30.

It won't be easy to defuse these land mines without doing some digging. But then, a little spadework is always preferable to getting blown up.

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