Take one look at the stock chart for Broadcast.com Inc. and you should get a feel for whether the euphoric highs and stomach-churning freefalls that characterize trading in Internet stocks are for you.
For some market players, the chance of a 256-per-cent gain between Monday and Thursday is irresistible. For many, that insane level of stress is best left to the pros.
For example, the frenzy surrounding Broadcast.com -- the Dallas-based company that broadcasts events from live concerts to Super Bowl games over the Internet -- drove the closing share price from $80.62 (U.S.) to $285.06 in four days on the Nasdaq Stock Market. Four days after that, the stock was back down to $139.81.
A host of Internet plays such as Yahoo Inc., Excite Inc. and Ebay Inc. have gone through similar gyrations.
Mutual funds that specialize in technology stocks offer the chance to participate -- at least to a limited extent -- in those seductive returns while mitigating the risk when things get ugly. The sector, which rebounded from the Asian crisis last year, will likely also offer some shelter if things deteriorate in Latin America this year.
Peter Brewster, editor of the Toronto-based Canadian Mutual Fund Adviser newsletter, said mutual funds offer a more diversified basket of potential winners, along with the wisdom of a professional money manager who can -- if not move with the market tempo -- at least try to keep pace. "The diversified nature of a fund softens the jagged edges on the chart a bit."
He adds that many investors don't have the time to research individual companies and stay on top of developments. "Most individuals have pretty limited access to any meaningful information."
Mr. Brewster said portfolio managers are likely moving in and out of stocks hour by hour, even minute by minute -- a style that few individual investors can master.
"The kind of guy who will manage a technology fund is almost certainly a hot-blooded trader," he said.
The returns chalked up by many technology funds last year were impressive: Fidelity's Focus Technology Fund gained 77.3 per cent, Altamira's Science & Technology Fund swelled 65.6 per cent and Bank of Montreal's First Canadian Global Science & Technology Fund was up 65.7 per cent.
Mr. Brewster points out that diversification can seem to work against investors because a few flame-outs always drag down the overall return.
So, while the returns were strong, the funds lagged far behind the best-performing stocks.
Still, funds allow individual investors the luxury of time. A fund that drops in one quarter may roar ahead the next. Unit holders should be prepared to wait out the downturns, he says. "It's not important for you to be able to turn on a dime."
Gordon Pape, author of the 1999 Buyer's Guide to Mutual Funds, believes that science and technology funds will be farther ahead five years from now -- but he also expects a lot of volatility in the meantime.
He advises investors to take a longer view and research the mutual fund and its style before buying in. Some managers load their portfolios with such blue-chip issues as Dell Computer, Microsoft Corp. and Intel Corp., while others gamble on the latest startup.
"Be sure you understand the investment strategy," Mr. Pape said.
He adds that, even through the mutual fund route, investors who buy into technology stocks are undertaking a significant degree of risk.
"People think they will chalk up gains of 30 per cent every three months and that's unrealistic," he said.
Mr. Pape also cautions investors against holding such funds inside a registered retirement savings plan, where he advocates far more conservative investments. He points out that investors who hold their stock market bets outside of an RRSP -- and lose big -- can take solace in the tax write-off allowed by Revenue Canada.
One-year return to Dec. 31, 1998
Fund % change Fidelity Focus Technology +77.3% First Canadian Global Science and Technology +65.7 Altamira Science and Technology +65.6 CI Global Technology Sector Shares +56.5 Average international equity +14.5% Talvest Global Science and Technology +53.7 Green Line Science and Technology +51.1 AIM Global Health Sciences +43.6 Universal World Science and Technology +43.1 Average Canadian equity -3.0%
Source: http://www.globefund.com