NEW YORK ( TheStreet) - With Intel ( INTC) and other hardware companies reporting growing profits lately, technology funds have been soaring.

During the past year, the funds have returned 24.7%, 10 percentage points ahead of the S&P 500, according to Morningstar. Now some analysts worry that technology shares have become too rich. Pessimists point to the sky-high prices that investors are paying for the private shares of Facebook and other Internet stars.

Are technology funds headed for a fall? Not necessarily. While some hot stocks seem overpriced, the average technology fund has a forward price-earnings ratio of 16.4, compared to 14.1 for the S&P 500. The multiple seems reasonable since analysts expect the technology sector to increase sales at a 5% annual rate. That's a strong outlook at a time when the economy is expected to grow at a 3% to 4% rate.

For a relatively safe way to hold technology stocks, consider Columbia Seligman Communications and Information ( SLMCX). Columbia has a long record of outperforming competitors in downturns. When technology funds lost 36.9% in 2001, Columbia stayed in the black. During the collapse of 2008, the fund outdid peers by 8 percentage points.

Portfolio manager Paul Wick has limited losses by steering away from high-priced stocks. During the technology boom of the 1990s, he stayed away from expensive Internet stocks. That caused the fund to trail during the bull market. But when the high-flyers crashed, Wick avoided the worst damage. By avoiding big losses, Columbia has recorded a sterling long-term record. During the past 10 years, the fund has returned 5.0% annually, while its average peer lost 1.5%.

Columbia aims to buy stocks that sell for reasonable multiples compared to their growth rates. A favorite holding is Symantec ( SYMC), a security software company that sells for a forward P/E multiple of 11. The business can increase earnings at a rate in the low to mid teens, says Richard Parower, a member of the Columbia portfolio management team. He says that the stock is undervalued because of the company's past problems. "They had execution hiccups in the past couple years, but they are finally getting their act together," he says.

Another holding is Amdocs ( DOX), which supplies software that is used for billing and managing customers. Clients include fast-growing communications companies. The shares sell for a forward P/E of 11.

To take on more risk and own faster-growing companies, try Goldman Sachs Tollkeeper ( GITAX), which has returned 9.6% annually during the past five years, outdoing its average competitor by 4 percentage points.

Portfolio manager Scott Kolar divides technology companies into two categories, bridge builders and tollkeepers. The bridge builders make hardware. They often have low margins because the businesses are capital intensive. The tollkeepers record recurring revenues by leasing software or providing services. Such businesses can have steady earnings and large profit margins because they are not capital intensive.

Instead of buying companies that build television sets, the fund prefers tollkeeping businesses that supply software used to purchase or rent movies over the Internet. A holding has been Netflix ( NFLX), which is increasing its business of streaming movies.

Another strong-performing fund is Matthews Asian Technology ( MATFX). Matthews has holdings in some of the world's fastest-growing technology markets, including China, Korea, and India. Make no mistake, Asian stocks can be volatile. The fund lost 51.9% in 2008. But the stocks have come roaring back in bull markets, rising 70.3% in 2009. Over the long term, the big rises have compensated for the falls. During the past five years, the fund has returned 7.6% annually, outdoing the average technology fund by 2 percentage points.

Portfolio manager Michael Oh says that the growth in Asia will continue for years because many consumers in the region have not yet begun using technology products. He says that only 35% of Chinese consumers have Internet access, compared to 75% in the U.S. The Chinese are racing to catch up.

Oh aims to buy dominant companies that he can hold for 10 years or longer. To buy champion businesses, he sometimes pays top prices. A holding is Baidu ( BIDU), the leading Chinese search company. The stock sells for a forward P/E multiple of 45, but Oh says the company is worth the price. "This is one of the best ways to get exposure to the growth in China's e-commerce," Oh says.
Stan Luxenberg is a freelance writer specializing in mutual funds and investing. He was executive editor of Individual Investor magazine.

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