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Bumpy tech road was real smooth over past month

Tech is on fire. Sure, it's a small fire -- especially when you compare it with the smouldering ruins of the tech crash more than six years ago -- but there's no question it has been a stellar month for science and technology funds. Over the past 30 days it has been the best performing asset class, while resource funds have languished amid falling commodity prices.

The average science and technology fund on the Canadian market has gained in value by more than 6 per cent in the past 30 days thanks in part to a 4.4-per-cent advance for the Nasdaq composite over the same period. That 6-per-cent in one month is a decent feat in this market climate, but is cold comfort when you consider that before this month, the average science and tech fund lost 4 per cent annually for the past five years. And at 2,270 points, the Nasdaq is still less than halfway to its turn-of-the-century high of more than 5,000.

Technology funds are different from many asset classes, however, in that the averages don't tell the whole story. The tech sector is more fragmented than most. It services different markets, evolves at a rapid rate, and returns are all over the map.

Of the thousands of funds on the market, the overall best performer has been AIM Global Technology with a 30-day return of more than 9 per cent. One of the fund's top holdings has been Texas-based Freescale Semiconductor Inc. Earlier this month, the wireless communication chip maker was the target of a $17.6-billion (U.S.) leveraged buyout -- the largest of its kind in the tech sector. Shares in Freescale rose nearly 27 per cent during the month.

Other top holdings in the fund having an exceptional September include Motorola Inc., Adobe Systems Inc., Oracle Corp. and even Canadian telecom stalwart, Telus Corp. Texas-based fund manager Michelle Fenton could not be reached for comment and it's not certain that the fund still has the same positions in the top holdings.

It's been a rough road for long-time holders of the fund and the higher-than-average 3.16 per cent management expense ratio hasn't helped. The fund lost an average 12 per cent annually for the past five years while the Nasdaq has held its losses to 3 per cent annually.

Adobe Systems is also a core holding that helped propel the Altamira Science and Technology fund to a 30-day gain of 6.6 per cent. Fund Manager Reza Samahin also credits other large positions in Cisco Systems Inc., Corning Inc. and Oracle Corp. "Tech is becoming more of a mature area. There's a small group that is faster growing so you have to pick those names," he said.

Mr. Samahin's current strategy is to spread his $59-million portfolio thin. He recently took advantage of a run-up in Microsoft to lighten a heavy weighting in that stock. The sector weightings in his fund almost mirror the Nasdaq 100: about two-thirds information technology, 17 per cent health care and the rest among other tech subsectors.

"Right now I'm a bit like the Fed," he said, referring to the U.S. Federal Reserve Board's neutral stance on the economy. "My outlook is contingent on a soft landing in the United States . . . that's why I have a big health care position."

Mr. Samahin said there are still plenty of bargains with growth potential in the tech sector as the Christmas shopping season draws near. He's filling his own shopping cart with consumer electronic stocks and some areas of the software and semiconductor sectors.

Genuity Capital markets technology analyst, David Hodgson said the continued success of the tech sector is contingent on a lot of "ifs."

Earnings in the tech sector have been fairly robust so far this year. New York-based Thomson Financial compiles corporate earnings results and expectations for the S&P 500. Their data for the technology component of the index shows a 6-per-cent increase in third-quarter earnings over last year. Increasing earnings and stagnant stock prices have been lowering price-to-earnings multiples drastically. The average PE for the Nasdaq 100 stands at 34 times earnings compared with triple-digit multiples at the height of the tech boom. That's still high compared with the Dow Jones industrial average, which trades at 22 times and the S&P 500 -- currently trading at 18 times. Considering the growth potential of the tech sector, Mr. Hodgson considers the multiples for the Nasdaq "reasonable."

That's not to say he's entirely sold on the notion that the Nasdaq is breaking out of its six-year slump. "The tech sector is notably more volatile than the broader markets," he said. "Any rebound would continue that volatility."

Dale Jackson is a producer at Report on Business Television.


30-day rebound


AIM Global Technology9.1%
TD Entertainment & Communications6.8%
Altamira Science & Technology6.6%
Altamira ebusiness6.6%
TD Science & Technology6.3%


© 2007 The Globe and Mail. All rights reserved.

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