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This week may feel like a salve to scorched tech-fund investors, but it's really a thinly veiled gut check.
Over the past week, despite a dearth of particularly compelling good news, chip and dot-com stocks have charged north. Tech funds, down more than 50% over the past 12 months, have jumped 20.1% on average in the five-session period through Wednesday. That's far and away the best one-week gain for the mercurial pack over the past 15 years, according to
. The previous best for the past 15 years was a 14.6% gain in the five trading days ending Oct. 15, 1998.
Big Week for Tech
Source: Morningstar. Returns through April 11.
Yes, today that's great news for all those folks holding shares of the ravaged funds, which gobbled up some 30 cents of every buck that went into U.S. stock funds last year. But here's the bottom line: There's no guarantee that this uptick will turn into a longer rally. And, in reality, these gains just underscore why these funds should only be about 5% to 10% of a diversified portfolio.
"I think this kind of performance is why these kinds of funds should be used at the edge of the portfolio, not the center," says Phillip Edwards, a managing director at
Standard & Poor's
global fund research unit. "They add some risk and return to the portfolio, but they're not a core holding, and volatility like this is why."
Volatile, indeed. The tech funds that jumped highest over the past week are those with the biggest bets on the currently bouncing chip and dot-com sectors. Fourteen funds are up more than 30% over the past five trading days. Of course, they're still down 68.3% on average over the past 12 months. This is a somewhat familiar pattern -- the funds that have fallen hardest often rise the highest, if only temporarily.
It's telling that this list doesn't just include oddball funds that make titanic bets on a thin sliver of the tech sector, like the
Internet Ultra Sector fund, the
Jacob Internet fund or the
Amerindo Internet B2B fund.
The biggest tech fund in the nation, the $9.7 billion
T. Rowe Price Science & Technology fund, is also on the list.
Beyond funds with tech labels, many closet tech funds have shared in this week's embarrassment of riches. A look at the top-five performing big- and mid-cap growth funds with at least $100 million in assets, excluding souped-up index funds, turned up many funds in Thursday's
Big Screen, which sifted for growth funds that deserve a tech-fund label. This tech-stuffed pack is down some 59% on average over the past 12 months, according to
Just missing our list are high-profile growth funds on hard times like the $12.3 billion
Fidelity Aggressive Growth fund, down 50.9% over the past year, and the $4.5 billion
Putnam OTC Emerging Growth fund, down 66.6% in the same period. The two funds are up 19.8% and 23.7%, respectively, during the past week.
These funds' sudden gains, like their vast losses, confirm their volatility. Still, they'll no doubt buoy the spirits of their shareholders. But those folks should keep a couple of things in mind: These gains aren't necessarily a sign of more bonny days ahead, and they don't mean you should buy or sell a share.
Some are reading chip-stock gains as a sign that the
is coming back to life. That's because chips -- the heart of many tech devices like cell phones and PCs -- often presage a rise or fall for the broader tech sector.
"Generally chip stocks are the first to go down and the first to come back. They are leading indicators," says Pat Dorsey, head of stock research at Morningstar. "The question that's unanswered is whether this really is sustainable or just another blip. I don't think this chip rally is for real. There just isn't much reason to think things are getting better yet."
Recent analyst upgrades in the chip sector rested on the unconvincing argument that business can't get much worse. At the same time, Dorsey points to
' cuts in their tech-consulting unit as evidence that they don't see tech spending rising anytime soon.
In any event, the footing for this week's rally -- and these funds' steep gains -- seems tenuous. Rather than convince you to commit more money to tech and tech-heavy funds, this week's bounce should cement the idea that their feast-or-famine DNA ought to make them bit players in most investors' portfolios.