NEW YORK (CNN/Money) -
It's been a rocky six months for tech so it should come as no surprise that technology mutual funds are the second worst performing fund category, according to fund research firm Morningstar.
On average, tech funds are down about 1.3 percent year-to-date. (Bear market funds are the biggest loser, with a loss of 4.7 percent.)
But several tech funds have bucked the trend. Amerindo Technology has surged nearly 30 percent. Jacob Internet has gained 12 percent. ProFunds Ultra Internet has returned 11 percent and Munder NetNet is up almost 8 percent.
So if these are the funds that are picking winners in a lackluster market, they are the ones you'd want to invest in, right? Not so fast.
You also have to consider the risk they've taken to get there. And by and large, these funds are making concentrated bets on extremely speculative stocks.
"Any time you see a substantial deviation in returns with a fund compared to its category, it's usually because it's taken a substantial risk to get there," said Christopher Traulsen, an analyst with Morningstar. "These funds aren't less risky now. It's just that the stocks they've invested in have finally started to come back."
Leaders are not for the faint of heart
Amerindo is the tech leader this year because it has made a handful of large bets on volatile stocks. As of the end of March, 87 percent of the fund's assets were in just 10 stocks.
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Biotech ImClone Systems (of Martha Stewart fame) was the top holding, accounting for 13.5 percent of the fund's net assets. Since ImClone has more than doubled this year, that has helped Amerindo significantly. Yahoo! and eBay are two other top-five holdings enjoying significant gains this year.
Munder NetNet has also benefited from the continued surges of Yahoo! and eBay. Through April, the two stocks were the fund's top holdings, accounting for nearly 14 percent of total assets. Other top 10 holdings include Monster Worldwide, Verisign and Ask Jeeves, which have all outperformed the market this year.
And Jacob Internet has placed big bets on several chancy Internet stocks, such as e-commerce outsourcing company Digital River and Web advertising tech firm ValueClick, and online financial news site (and CNN/Money competitor) MarketWatch.com. These three stocks are all up at least 30 percent this year.
But how much further can these Net stocks run? Traulsen said investors should be concerned. "A lot of the companies these funds have invested in have run pretty hard," he said. "Chasing performance here is probably a recipe for disaster."
It's impossible to know for sure where the Nasdaq heads from here. But should there be another bear market for tech, these types of holdings aren't likely to hold up any better than they did during the last one: Amerindo has an average 5-year loss of 13.3 percent, compared to just an 8 percent annual loss for its peers. Munder NetNet has posted an average annual loss of 15 percent.
Some cheaper, safer tech funds
Making matters worse for investors is that many of these funds are pretty expensive. The average expense ratio for a tech fund is 2.1 percent, according to Morningstar. Amerindo's expense ratio is about 2.3 percent while Munder Net Net's is over 3 percent.
Rosanne Pane, mutual fund strategist with Standard & Poor's, said that investors should be able to find several tech funds with lower expense ratios and more solid long-term track records.
* as of 6/23/04 | Source: Morningstar |
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She points out T. Rowe Price Media & Telecom, which has an expense ratio of just 1.1 percent and an average annual return of 5.2 percent over the past five years, as a safer tech option. Fidelity Select Software fills the bill as well, with an expense ratio of 1.1 percent and average gain of 5.5 percent over the past five years.
The Waddell & Reed Science & Technology fund could also be a good choice. The fund has about two-thirds of its assets in tech stocks but also invests in healthcare in order to minimize volatility. The expense ratio is just 1 percent and the fund has returned nearly 6 percent on average over the past five years.
All in all, Pane said that the more spread out a fund's stock picks are, the more likely you are to enjoy steady long-term gains...and sleep well at night.
"If someone is really interested in tech, look at a growth fund with a large position in tech but are also more diversified," said Pane. "It helps reduce the risk."
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