Is your technology fund's poor performance making you ill?

One fund manager has a possible remedy: Mix in health care stocks.

The average technology fund is down 10.3% this year, making it the worst-performing fund category tracked by Morningstar. But the $2.1 billion


Waddell & Reed Advisors Science & Technology fund, managed by Zach Shafran, is down just 3% this year, right on par with the

S&P 500


He has protected his shareholders from the tech bug by adding attractively valued health care stocks, notably hospital and managed care names, to his science and tech portfolio.

checked in with Shafran to see how he arrived at the healthy combination and what names he prescribes going forward.

What's the thought process behind mixing health care and technology stocks in your fund?

First, our mandate is duly focused on science and technology. Second, as we look around, science and technology in some form or another are touching our lives multiple times every day. And third, as we look around, science and technology are the two areas that we believe have the best growth opportunities going forward.

Tech on the whole has not been working that well this year. Are there specific pockets within tech that have been working for you?

To say tech hasn't worked well is almost being kind. Tech has been a disaster. Although it has been less of a disaster than we've seen in recent years, so I guess that's somewhat encouraging. But certainly it has not been an area where people have put a lot of money.

The things that have worked and we believe will continue to work are really selective ideas or companies as opposed to particular sectors. When we are asked about a sector in tech like software vs. hardware, we typically point out whether or not we like certain names within that sector instead.

Perfect. So let's get to some individual names. It looks like you added Google

(GOOG) - Get Report

in the last quarter. Isn't it a bit late to pick that stock up? Or does it still have a way to go?

Google is now our second-largest position, at just over 4% of total assets. We think Google has a long way to go. We have yet to see a company that has capitalized on the benefits associated with Internet advertising and search the way Google has. And not only is it doing it in the U.S., but it's doing it globally, and that's a big opportunity.

You also held Apple

(AAPL) - Get Report

but recently let it go. Why?

Apple is no longer a holding. We continue to think that Apple will feel the benefits of the growing brand recognition through its success in the MP3 player market by selling more computers. But we think, at the current price, that's largely reflected.

In your portfolio you have XM Satellite Radio


, but I don't see Sirius

(SIRI) - Get Report

. Why one and not the other?

We are very big fans of the whole satellite radio opportunity. We think we are very early in that business in terms of the number of subscribers and the number of things that people will be able to do with satellite radio both in the car and out. We prefer XM over Sirius for a few reasons, notably valuation and technical expertise when it comes to hardware.

One more question on tech, and then we'll turn to the health care side of your portfolio. It looks like you've trimmed your position in Research In Motion


recently. What's your current view on RIM?

Research In Motion was our largest position for the majority of last year. It was a very good stock. It's had a tougher time this year. It's now our third-largest position, and we are still excited about it from a fundamental and share price standpoint. We think the valuation more than reflects any perceived competitive threats that are out there. In fact, they just announced this week they crossed the 3 million subscriber mark much earlier than expected, so business momentum is very strong not only in the U.S. but around the globe.

Let's get to the health care side of the portfolio. Health care has worked in the last month as interest rates have gone down. But on the other hand, health care stocks rose directly in tandem with rates last year. Is there a connection between the two or not? People make different cases.

I can't really comment on any correlation between the two, but what I can say is that the market is pretty reasonably priced, if not attractively priced, at around 15.6 times earnings when you look at the S&P 500. When we look at health care, we think there have been a number of companies that have been unduly punished for a variety of reasons, some justified and some not. And we think, based upon the cash flow and growth profiles, these companies are appealing. That's why we've had some pretty big bets in two areas: hospital management and managed care.

Why hospitals?

It's pretty simple. They are not going away, and they've been treated in the marketplace as if there is a fundamental secular problem there. Granted, they have seen some problems like rising bad debt expense. But we think the worst is over, and we think there are a number of companies improving their operations. If I had to identify one in particular that we like from a fundamentals and valuation standpoint, it would be

Triad Hospitals

(TRI) - Get Report


What about managed care?

That's an area where we see tremendous opportunity, especially in health care reform and particularly prescription drug benefits. Those are two things that are going to boost the importance and appeal of managed care companies. And if we had to identify two names in that space, it would be


(WCG) - Get Report




. Those are two companies very well positioned to benefit going forward -- WellCare, in particular, because of the opportunity in Medicare and even more specifically in Medicaid.