The Big Screen: Sector Funds a Cut Above the Rest

If you're looking for sector funds, we've done some legwork for you.

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We combed through each sector-fund category, fishing for funds that have beaten their peers over the past one and three years. We tossed out funds whose managers have held the reins for fewer than three years, those that are closed to new investors and those that have less than half their money invested in their given sector -- an oddity we highlighted last week.

Here are the funds that made our cut. Let's take a look at some standouts.

Before we get started, one caveat: Funds that invest your money only in one sector, like health care, or one subsector, like biotechnology, can be risky even in good times. Their focused approach can lead to stocklike gains and stocklike volatility. That's why they shouldn't add up to more than 10% of your portfolio.

A Sector Fund Smorgasbord A short list of sector fund short lists
Technology Funds
Fund	3-Year Annualized Return	1-Year Return
(TVFQX)Firsthand Technology Value	24.7%	-55.7%
(PPTIX)North Track PSE Tech 100	23.1	-37.4
(SHGTX)Seligman Global Technology	12.3	-39.3
(RSIFX)RS Information Age	11.6	-53.7
(SLMCX)Seligman Communications & Information	11.6	-29.9
Avg. Peer	10.7	-56.1
Health Care Funds
Fund	3-Year Annualized Return	1-Year Return
(ETHSX)Eaton Vance Worldwide Health Sciences	35.2%	-11.1%
(VGHCX)Vanguard Health Care	23.9	7.1
(MAHCX)Merrill Lynch Healthcare	19	-6.6
Avg. Peer	18.8	-12.1
Utilities Funds
Fund	3-Year Annualized Return	1-Year Return
(GASFX)American Gas Index	12.4%	2.1%
(AUIYX)Alliance Bernstein Utility	12	-11.3
(SAMUX)Strong American Utilities	12	5.3
(PRUAX)Prudential Utility	10.4	-0.8
(INUTX)AXP Utilities Income	7.5	-6.3
(FKUTX)Franklin Utilities	6.4	10.5
Avg. Peer	6.3	-11.9
Financial Services Funds
Fund	3-Year Annualized Return	1-Year Return
(ICFSX)Icon Financial	15.5%	32.8%
(TFSIX)Mutual Financial Services	15.2	36.7
(FBRSX)FBR Small Cap Financial	11.6	45.4
(FBRFX)FBR Financial Services	8.8	36.1
Avg. Peer	7.3	13.6
Natural Resources Funds
Fund	3-Year Annualized Return	1-Year Return
(ICENX)Icon Energy	23.9%	12.2%
(SSGRX)State St. Global Resources	17.2	25.7
(IGNAX)Ivy Global Natural Resources	15.8	12
(MAGRX)Merrill Lynch Natural Resources	15.7	2.9
(VGENX)Vanguard Energy	12.8	7.1
Avg. Peer	11.9	2.1
Telecommunications Funds
Fund	3-Year Annualized Return	1-Year Return
(GABTX)Gabelli Global Telecommunications	9.6%	-28.7%
(GICPX)Gabelli Global Growth	7.4	-38.5
(TISHX)Deutsche Flag Communications	3.5	-37.7
Avg. Peer	3.2	-49.5
Source: Morningstar. Returns through Aug. 8.

Consider that over the past 12 months most sector fund categories are in the red. The damage can be dramatic: Witness the average tech fund's jaw-dropping 56% fall over the past year.

Given those losses, most sector funds are seeing outflows this year. But if you're a believer in a sector and willing to hold on to your investment for at least five years, there are some good funds and managers out there.

If you're an unflinching tech bull, for instance, you might check out the no-load (TVFQX)Firsthand Technology Value fund, run by Kevin Landis, or the broker-sold (SHGTX)Seligman Global Technology and (SLMCX)Communications & Information funds, both run by Paul Wick. Landis, who stopped by last week for an interview, and Wick have both beaten their average peer over the past one, three and five years, according to Chicago fund-tracker Morningstar. Each fund spreads its money broadly around the sector with a more price-conscious approach than its peers.

A Tale of Whoa! Most sector funds are underwater over the past year

Source: Morningstar. Returns through Aug. 8.

If you're looking for a slightly racier approach, check out the no-load Dresdner RCM Global Technology fund, which joined our Ima Winner Fund Club last week.

The three health care funds that made our cut are run by the category's graybeards: Sam Isaly ((ETHSX)Eaton Vance Worldwide Health Sciences), Ed Owens ((VGHCX)Vanguard Health Care) and Jordan Schreiber ((MAHCX)Merrill Lynch Healthcare) -- check out today's interview with Schreiber.

Each has run his fund since the 1980s and each has beaten his average peer and the S&P 500 over the past one, three, five and 10 years. The star is the no-load Vanguard fund, which combines better gains, less volatility and far lower expenses than its average peer -- just a 0.38% expense ratio compared with 1.74% for the average health fund. The only problem is the fund's $25,000 investment minimum, so it might make sense to check the other two or the (FSPHX)Fidelity Select Health Care fund, which changes managers too often to make our cut but does feature a deep bench of analysts.

If you're interested in the utilities sector, try the no-load (SAMUX)Strong American Utilities fund and the broker-sold (INUTX)AXP Utilities Income fund. Unlike many of their peers, these funds tend to take a more diversified, price-conscious approach with more emphasis on electric and natural gas utilities companies than telecom shops whose shares have tumbled over the past year. Each fund tops more than two-thirds of its peers over the past one, three and five years.

Until recently, the broker-sold (TFSIX)Mutual Financial Services fund would be the standout among the financial funds on our list, but manager Raymond Garea is retiring in a couple of months. So, you might check out the no-load (FBRFX)FBR Financial Services fund. Dave Ellison, who's run the fund since its 1996 inception, tends to favor bank stocks but has beaten more than 70% of his peers over the past one and three years. Another possibility is the broker-sold (FIDAX)John Hancock Financial Industries fund; although veteran manager Jim Schmidt has stumbled recently, the fund still merits a look.

If it's a natural resources or energy fund you're after, Ernst Von Metzsch's no-load (VGENX)Vanguard Energy fund deserves a long look. He's run the fund since its 1984 inception, taking a purist approach that focuses mainly on oil companies. The fund has topped its average peer in seven of the past 10 years and its 11.6% 10-year annualized gain beats 70% of the category.

Finally, if you're brave enough to wade into the bloody telecom-fund waters, we've turned up a couple of solid choices. Mario Gabelli and his son Marc, co-managers of the (GABTX)Gabelli Global Telecommunications fund, as well as Bruce Behrens and Liam Burke, co-managers of the (TISHX)Deutsche Flag Communications fund, tend to spread their bets and avoid the most speculative names in the sector. In a tough period like this, that less aggressive approach has served each team well; their funds beat their average peers over the past one, three and five years.

We have one last suggestion, before you break out your checkbook. Once you've found a fund you like in the sector you love, consider breaking your investment into equal monthly payments. This strategy, called dollar-cost averaging, can protect you from a continued downdraft, ensuring you're buying more shares when prices are low and fewer when they're high.

Even a rabid bull can appreciate that approach.

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