Last Year's Tech-Fund Leaders Cling to Their Top Spots

But the 10 largest stock funds are all in the red for January.
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Conventional wisdom has it that last year's fund winners turn into this year's losers. If so, technology funds should be making their way to the back of the pack -- but they're not budging.

Technology funds set the pace for funds last year, with a stunning 135% average return. And through the first month of 2000, little has changed.

Though in the red for the year so far, science and technology funds are still doing better than those focused on large-cap stocks, value stocks and the leading indices.

Looming interest-rate hikes hit financial and cyclical stocks harder than tech stocks in January, dragging down broad-based indices like the

S&P 500

, down 5.1%, and the

Dow Jones Industrial Average

, off 4.8%. Meanwhile, the tech-heavy

Nasdaq Composite

has lost just 3.2% through Monday.

The fabled "January Effect," where eager investors often prop up stocks at the start of the year, came in December for tech stocks and hasn't truly dissipated, says Ed Rosenbaum, director of research at fund-tracker

Lipper

.

Four of the top five tech funds in last year's

Century Club of funds with triple-digit returns are ahead of the average stock fund for the year, flying in the face of the first-to-worst theory. For instance,

PBHG

(PBTCX)

Technology & Communication, which posted a 244% return in 1999, is up 2.9%.

Meanwhile, the 10 largest stock funds are firmly in the red. The two biggest funds,

Fidelity

(FMAGX) - Get Report

Magellan and

Vanguard

(VFINX) - Get Report

500 Index, are down 4.8% and 5%, respectively, in line with the S&P 500's loss.

But confounded traditionalists can rest assured -- sort of -- because Japan funds are proving that hot funds can cool down just as quickly as they heat up. Last year, the average Japan fund returned over 120%. So far this year, the average Japan fund is down more than 6%, and many of last year's highfliers, including

Warburg Pincus'

(WPJGX)

Japan Growth and

(WPJPX)

Japan Small Company funds, down 13.6% and 11%, respectively, have fallen a bit harder. The category is among the five worst-performing ones of 2000.

"Part of it was currency -- the yen weakened by 3% to 4% -- and sector rotation," explains Todd Jacobson, co-manager of the Japan Growth and Japan Small Company funds. Jacobson says he's comfortable with the long-term prospects of the companies he owns, but he adds that last year's hot Japanese sectors -- communications and technology -- gave way to laggards like paper and steel companies in January.

So if it looks like the curse caught up with Japan funds last month, when will it catch up with tech stocks? That's the $64,000 question -- not adjusted for inflation.

"Some clients have been nervous about tech stocks for the past two years now. It's against conventional wisdom that

tech stocks will keep going, but they have because technology has just captured the imagination of the nation," says Ron Roge, a financial planner with

R.W. Roge & Co.

in Bohemia, N.Y.

Roge and other advisers aren't eager to guess when tech stocks will fall from their lofty valuations because if the planners had pulled out last year, their clients would have missed out on significant performance. Beyond tech stocks, "we've been in a stealth bear market for a year," Roge says.

Meanwhile, there's a corollary to the first-to-worst theory, and it's that last year's worst-performing categories will turn into this year's winners. So far in 2000, that theory is only half-right.

At the end of last year,

TSC

noted that categories like financial services and health care might ride a rising tide this year after a relatively quiet 1999. And, in fact, health care funds lead all stock-fund categories, with a 9.2% return in January, according to Lipper.

Of course, our humility is restored after a glance at financial-sector funds' negative 4.9% January return. This proves

again not only that journalists are often lousy investors, but also another old saw, too: For most investors, a diversified long-term plan is better than rejiggering a portfolio according to old proverbs. Making decisions based on worst-to-first strategies or similar theories is a tough game to win, since even pros rarely know when leaders and laggards will switch seats.