With U.S. warplanes swarming over Afghanistan and Special Forces troops readying to take to its ground, financial planners have begun to get calls from investors inquiring about defense-related investing.

The interest started after the terrorist attacks of Sept. 11, when investors, sure the country was headed for war, began examining defense-related equities. Now, if investor interest increases and the conflict overseas escalates, analysts and financial planners speculate fund companies may begin offering defense-related sector funds. They base their theory on the idea that a long military struggle, coupled with a Republican leadership bent on growing military forces and developing new defensive technologies, could revive a troubled defense sector.

The war "has certainly heightened interest in this area," said Anthony Vargo, who leads investment management at Legend Financial Advisors in Pittsburgh. "If we see strength within the pure defense plays and if this is as protracted as it is expected to be, you could see the launch of sector-specific funds in this area,"

A Dearth of Defense Funds

The fund industry has mostly avoided defense-related funds. In fact, only one exists: Fidelity Investments' Select Defense and Aerospace Portfolio, a mid-cap, blend product that invests in the likes of Northrop Grumman Corp., General Dynamics Corporation, Lockheed Martin and Newport News Shipbuilding. The fund was launched in the mid-1980s.

The defense sector has struggled in recent years, said Jane Young, a partner at the financial planning firm Pinnacle Financial Concepts. President Clinton's administration made deep cuts in military spending, wounding defense contractors across the country. More recently, the defense companies that have maintained manufacturing interests in the aerospace industry have been punished by travelers' reluctance to fly. "You've seen delivery cuts with Boeing and Airbus," Vargo said. "There's a lot of weakness in that area."

But analysts say mutual fund companies have mostly dodged the idea of launching defense-related products because the products are problematic in themselves. Like other sector funds, they are volatile in nature, Young said, and they are obviously not a good choice for an investor looking to diversify a portfolio.

Defense Difficult to Market

The products are also difficult to market. "Apparently there are some challenges," Vargo said. "Otherwise, we would see more than just Fidelity's fund...Maybe having an aerospace and defense fund is not something that's going to attract investors. Technology may have more sex appeal to it than a hum-drum industry like defense."

And should a company decide to build and market a defense fund, Vargo said, marketers will be challenged to tastefully capitalize on the business of war. "It does have a morbid appeal to it and as a result mutual fund companies probably feel challenged about adding a sector-specific fund to their products."

Indeed, Fidelity has not marketed its defense product in the past and has no plans to do so, a company representative said.

Interest Difficult to Measure

Now, in the wake of the attacks of Sept. 11 and the war that has ensued, any assessment of investor interest in defense-related products is anecdotal and hard to gauge. Analysts are not sharing enough data to render a clear picture of that interest since Sept. 11. And Fidelity has not yet disclosed its defense product's flows for September. Financial Research Corp., meanwhile, has only tabulated flows in the product through August, when the fund saw outflows of $1.7 billion.

Aside from the inquiries financial planners are getting, the only indication that investors are interested in defense funds could come from Morningstar's Web site. Russ Kinnel, who heads fund research at the firm, said a synopsis of the product on Morningstar's site had been viewed by nearly 7,000 people during the past month. Before Sept. 11, the information drew the attention of about 2,000 investors each month.

Vargo said demand for defense products may be outpaced by a rise in biotech firms who offer new research and products that show promise in thwarting biological attacks such as the current anthrax scare. "This anthrax issue certainly increased [investors'] interest in this particular area," he said.

But even if investors begin to clamor for new defense products, financial planners say a war doesn't necessarily mean military contractors make for good investments. Defense companies will have to attract new contracts from the government in order to benefit from the war, Vargo said. For that to happen, he said officials will have either to decide that current quantities of military hardware are inadequate to fight the war, or forces overseas will have to sustain losses, generating contracts for new planes, vehicles and equipment.

In addition, with the Bush administration promising an unconventional war fought with Special Forces and covert operations, Young wonders if defense companies that manufacture fighter planes and artillery vehicles will reap the benefits. Instead, an entirely different arsenal of light equipment and high-tech hardware may bring a spate of companies to the forefront of the defense sector.

"Maybe we should invest in night-vision goggles," she said.

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