If you've owned a sector fund over the past couple of years, you probably took a beating. The only silver lining: That rough patch can help us find some steady types now.
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The rule of thumb is that sector funds shouldn't make up more than 5% or 10% of your portfolio, but plenty of investors loaded up on them in 1999 and 2000 as the
bubble inflated. Since it popped, those folks have suffered worse than most thanks to their big bets on popular but sagging areas like technology and telecommunications.
This week the Big Screen sifts the various sector-fund categories, looking for those funds that weathered the storm best. In each category we yanked out any funds that didn't top their average peer over the past one and three years, and have a manager who has held the reins at least that long, using data from Chicago research house Morningstar. Then we removed any funds that were closed to new investors, sold only to institutional investors or had less than half their money invested in the sector they're supposed to focus on -- a bizarre trend we've highlighted in recent weeks.
When at least five funds made our cut, we ranked them by their returns over the past three years. Let's single out some funds in each category that made our cut and a solid one that just missed out, starting with tech funds.
Icon Information Technology fund tops our list. Since the fund's 1997 launch, manager Craig Callahan has used quantitative models to dig up companies in the tech and telecom industries in which rising earnings might not be reflected in their stock prices. The fund trounced its peers over the past one and three years. One caveat is that Callahan's definition of tech is broad. While most of the fund's money is in tech stocks now, it had just 55% of its cash there in 2000 while the rest was in more industrial areas.
Both the no-load
Berger Information Technology and
Dreyfus Premier Technology funds have topped their average peers each year since their respective 1997 launches -- a rare feat in a mercurial string of years. The funds, run by Bill Schaff and Mark Herskovitz, respectively, favor companies with solid earnings growth but steer clear of the priciest fare.
One solid fund that made our cut, but didn't crack the top five, is the broker-sold
Seligman Communications & Information fund, at which veteran manager Paul Wick has called the shots for 11 years.
Among the health care funds we dug up, the broker-sold
Eaton Vance Worldwide Health Care and no-load
Vanguard Health Care funds stand out. The funds, run by Sam Isaly and Ed Owens, respectively, spread their money broadly across the sector's industries. While that diversification has kept volatility low, it hasn't hurt returns. Both funds have beaten their average peers and the
over the past one, three, five and 10 years.
One downer is that the $17.3 billion Vanguard fund is the largest sector fund in the nation and requires a $25,000 minimum investment. Two other solid options are the
Fidelity Select Health Care fund and the broker-sold
Merrill Lynch Healthcare fund. The Fidelity fund is typically a solid performer due to the Boston firm's deep analyst bench, but missed our cut due to management changes and a recent stumble. The Merrill fund, run by
Jordan Schreiber since 1983, offers broad exposure to the sector and solid returns, though it narrowly lagged the category over the past five years.
Just three utilities funds cleared our hurdles, and all are broker-sold:
Van Kampen Utility and
AXP Utilities Income. Each is a low-risk option in a category in which aggressive types were hurt by big telecom bets. These three funds focus on stocks of companies with higher earnings growth than their peers, but reasonable valuations. Two other intriguing options are the broker-sold
MFS Utilities fund and the
Fidelity Utilities fund, which have fallen off the pace recently but still boast solid track records over the long term.
Icon's Callahan has a no-load
Financial fund on our list, as well as a tech fund. Also run according to his quantitative screens, this fund has topped its average peer in each of the past four calendar years. Many of the other funds on our list got there via a focus on
small-cap stocks, like the chart-topping and broker-sold
Emerald Banking & Finance fund. A broader fund that made our cut, but not the top five, is the no-load
FBR Financial fund where Dave Ellison has been in charge since the fund's launch at the start of 1997.
Peek at the energy funds in our net and you'll find yet another Icon fund and the
Vanguard Energy fund, which might be the class of the category.
Callahan uses his screens to find ideas for the
Icon Energy fund, too, and it has paid off. The fund has led its average peer in three of the past four years.
Ernst von Metzsch has run the Vanguard fund since its 1984 inception with solid results. Over the years he's spread his bets across the sector and shunned frequent trading. His diversified and price-conscious approach has paid off. The fund has outperformed its average peer over the past one, three, five and 10 years.
Last, but perhaps least, we come to the ravaged communications bin. During the economy's downturn, sagging demand for telecom products and whittled cash from Wall Street have crushed many telecom shops' shares and forced others out of business. The average fund in this sorry pack averages an 8% annual loss over the past three years.
The only two telecom funds that cleared our obstacles are the no-load
Gabelli Global Telecommunications and
Gabelli Global Growth funds. The former is run by Mario Gabelli and his son Marc, while Marc runs the latter on his own. Both funds take a strict value approach, for which the managers usually buy a stock when they think a company is trading below its private market value. While the cautious strategy can hold the funds back in go-go markets, they have managed to beat their peers over the past one, three and five years.
Another fund you might consider in this category is the
Deutsche Flag Communications fund, where lead manager Bruce Behrens has been at his post since 1984. He and co-manager Liam Burke aren't shy about making big bets on individual companies, but their tendency to favor companies with healthy balance sheets has saved them a bit of pain over the past few years. The fund is down 37% over the past 12 months, but beats its average competitor over the past five and 10 years.
Well, there you have it, a long list of short lists in each sector-fund category.
Ian McDonald writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to
firstname.lastname@example.org, but he cannot give specific financial advice.