Don't fold those pitiful tech funds just yet. A second-half comeback just might be in the cards. The average specialty technology fund is down 5.28% in 2005, making it Morningstar's worst-performing category among all equity mutual funds. That's a long way down from the top of the table, where energy and utility funds have soared 16% and 11%, respectively, since the start of the year. Karen Papalois, Morningstar's tech fund analyst, says the category, which boasts 289 funds holding a combined $34.8 billion in assets, has been out of favor for some time, but is "due for a comeback." Papalois is not alone in her belief that tech should rise again in the second half. Fund managers, Wall Street analysts and even a certain "Mad Money" man named Cramer have been pounding the table about tech's comeback, urging investors to get over their postbubble trepidations and begin buying again.
Jonathan Rudy, a tech analyst at Standard & Poor's specializing in software companies, notes that tech shares have risen in the second half in 11 of the last 12 years. A lot of that outperformance, says Rudy, is due to investor enthusiasm in advance of new products being rolled out in the fourth quarter, as well as the so-called "budget flush," when corporate information technology officers spend money for fear of losing those dollars the following year. "People get excited about the fourth quarter, especially in software, because of the budget flush," says Rudy, comparing it to government agencies that either spend or lose their appropriation. Software companies should be the big winners, says Rudy, especially Microsoft ( MSFT - Get Report), which will be rolling out a new version of Xbox ahead of the Christmas holidays. Microsoft will also benefit from the fourth-quarter buzz ahead of the release of its Longhorn operating system in 2006. He also likes McAfee , a provider of security software, an area that, he says, should get increasing amounts of tech budget dollars -- before they get flushed, of course. Ed Maraccini, portfolio manager at Johnson Asset Management, has another reason for believing tech's fortunes will soon be turning. "Corporate America has plenty of cash on their balance sheets, and they will reinvest in infrastructure in the second half," says Maraccini. "The consumer has spent his money up till now keeping the economy afloat and the corporate side will start picking up the slack from here." With that in mind, Maraccini favors tech companies like Artesyn Technologies a power conversion equipment supplier that should benefit from companies choosing to reinvest in their tech infrastructure. Maraccini admires Artesyn's low debt and a strong cash flow. He cites the same reasons for choosing Internet software company Verity ( VRTY), which has zero debt and might also be a potential takeout play.