Skip navigation

Mutual Fund News

Tech funds only for the brave of heart

Sector proves tough to evaluate as record reveals big losses

MUTUAL FUNDS REPORTER

Stuffing dollars under your mattress may appear tempting if you've taken part in the technology mutual fund meltdown.

"This sector is volatile, very volatile," said BMO Nesbitt Burns Inc. analyst David Wright. "The advantage of a fund is you can put a little bit of money in and get the diversity for the sector. That's why they're popular. Whether you pick the right fund or not is another story."

Odds are most investors picked the wrong fund. The returns of 20 science and technology funds that have a five-year history are grim. According to Morningstar.ca, only three have outperformed the negative 11.5-per-cent return posted by the Nasdaq Stock Market's composite index for the period ended July 31. The winning trio are Dynamic Canadian Technology Fund, TD Entertainment and Communications Fund and Trans IMS Canadian Communications Fund.

"The five-year numbers for the tech funds are horrible," said analyst David O'Leary at independent fund rater Morningstar Canada. "Most of them haven't been able to recover from the crash. Many of them were buying big names during the runup in 1999 . . . they got in at the top and are now trying to claw their way back."

Short-term performance is ugly, too. Only 47 of 106 tech funds reported positive returns for the 12-month period ended July 31. In comparison, Nasdaq's composite index was up a slender 2.7 per cent.

The market's warped sense of tech valuations is part of the problem. At the height of the Internet-fuelled bubble in March, 2000, the world's 30 largest publicly traded software firms had a total stock market value of $65-billion (U.S.). For most of the past 25 years, that same group's value has hovered between $8-billion and $15-billion.

The bubble may be gone but a long list of factors make it very tough to evaluate the sector. In recent years, the personal computer market has matured, corporate and consumer spending on technology has been hard to call and a long list of economic issues are nibbling at the market's confidence.

"We have a very hard time forecasting earnings for a technology company," said Michael Sola, manager of the $211.5-million (Canadian) TD Science and Technology Fund and a vice-president of T. Rowe Price Associates Inc. in Baltimore.

In addition to traditional peer and market evaluations to determine a tech stock's worth, he looks at broader economic forces, including economic growth and consumer spending. "Growth rates are now decelerating and people are trying to decide what is the appropriate growth rate for a technology company. I try to look at what are the odds. It's a game of strategy, a game of risk and reward."

To limit risk, some tech funds are diversifying and, as a result, are looking less and less like a specialized sector fund. For example, CI Fund Management Inc.'s CI Global Science and Technology Fund owns tech-influenced media, health care and aerospace stocks.

The broader mandate "allows us little bit more flexibility in positioning the fund, depending on our medium-term outlook," said André Desautel, manager of the CI Global Science Fund and a principal at Trilogy Advisors LLC in New York.

Mr. Desautel calculates a number of scenarios, including the best-case and worse-case, before buying a stock for the $400.5-million fund. "We are trying to gauge what is the price of being right and what is the price of being wrong" to limit risk.

Toronto's Tera Capital Corp., meanwhile, is somewhat of a market contrarian, purposefully avoiding stocks of companies such as Microsoft Corp., Intel Corp. and other U.S. blue chips that make up the balance of many rival funds.

Tera's purchases over the past year include little-known companies Microtune Inc., a radio technology firm, and medical imaging equipment maker Cedara Software Corp. For the 12 months ended July 31, the Tera Capital Global Technology Fund reported a sector-leading return of 54 per cent.

"We don't own the names that I think will be marginal," said Tera partner Howard Sutton. "We look for undiscovered gems."

There are some rumblings that the sector may now be appealing. For the first time in months, fund managers interviewed are in a buying mood. A series of profit warnings sparked a general tech selloff this summer, leaving many software and semiconductor firms attractively priced. Trilogy Advisors, for example, has recently bought positions in PeopleSoft Inc., Oracle Corp. and Samsung Electronics Co. Ltd. for the CI funds it manages.

But for every bull there is a bear.

Dan Hallett, president of Dan Hallett & Associates Inc., is no fan of sector funds, noting that tech funds, along with precious metal and international funds, have a very volatile history. He advises investors to have a good look at their current tech exposure via venture cap funds, high-yield bond funds and labour-sponsored funds before making any decisions.

"People have to be careful with any sector," Mr. Hallett said. "Investors have traditionally not done well trying to time these things."

Tech trouble

Some of Canada's largest technology and biotech funds have posted dismal returns

As of July 31, 2004

.................................Assets under............1-year...........3-year.............5-year

.............................management-$million.......return.........total return........total return

CI Global Science &

Technology Sector...............$400.5..................+6.1%...........-8.2%............-15.7%.

BC Life Science &

Technology......................$300.9...................-7.3%...........-18.2%............-12.1%

CI Global

Biotechnology Sector...........$253.2..................-4.6%.............-4.6%.............-

TD Science and

Technology......................$211.5....................-1.6%............-16.9%...........-17.1%

BMO Global Science &

Technology.......................$174.5..................-3.2%............-13.2%...........-11.7%

© 2007 The Globe and Mail. All rights reserved.

Search Fund News


Advanced Search

GlobeinvestorGOLD.com

Only GlobeinvestorGOLD combines the strength of powerful investing tools with the insight of The Globe and Mail.

Discover a wealth of investment information and and exclusive features.

Free E-Mail Newsletters

  • Morning news headlines
  • Morning business headlines
  • Financial highlights
  • Tech alert
  • Leisure

Sign-up for our free newsletters



Back to top