In the midst of a recession, and coming off a year of weak flows for equity funds, Craig Callahan has some astounding news: tech funds are coming back into vogue.

Callahan, the chief investment officer at Icon Funds, which offers the industry's second-best-selling tech fund, said that stocks in the technology sector have finally bottomed out. And now he is unabashedly bullish on them.

"Technology has been a leader," he said. "It deserves to be getting new money as a sector."

Indeed, Financial Research Corp. reports that net new assets in tech funds increased to a $317 million in October and November of last year from negative $3 billion in the year's third quarter.

It's too early to tell whether the growth will continue. Assets in the products were down for the year 38%, according to Morningstar. And net outflows from tech funds amounted to $5 billion, according to FRC. But many observers say, if and when tech funds mount a substantial comeback, fund companies would be fools to market them the way they did the last time the products were thriving.

In the 1990s and in early 2000, companies touted the funds' double-digit short-term gains in marketing campaigns. Investors, swept up in a quick-buck mania that had overcome the private sector, bit. They over-allocated their assets in the technology sector, analysts say. And when the sector imploded, investors got burned.

Change in Tune Needed

This time around, executives say fund companies need to be straight with investors about how to properly incorporate the products into their portfolios.

"Investors may have felt that they were fooled, not necessarily by the industry, but by the culture at large and the hype surrounding tech funds," said David Kanihan, a spokesman for American Express Funds, which runs AXP Innovation, the industry's eighth-best-selling tech fund. "I would be surprised if consumers were receptive to the message, Hey, it's the 90s all over again-let's make some money!' I think consumers are going to be a little more wary."

Lisa Cohen, a principal at sales consulting firm The Collaborative, said fund companies need to encourage investors to use tech products as supplemental vehicles in conjunction with less-volatile funds.

"Investors seem inclined to hop on whatever is performing well," Cohen said. But "it doesn't serve anyone to watch investors ride them down."

Some already worry that investors will see the improved performance as a signal to jump back on the tech bandwagon. Observers say the recent boost in net new assets for the products is largely the result of performance. The sector posted gains of 36.9% during last year's fourth quarter, said Chris Traulsen, a Morningstar analyst who specializes in tech funds. If flows increase in the products, Traulsen said it would be a troubling indication that investors are chasing performance again.

Rick Edelman, who heads the financial planning firm Edelman Financial Services, points to Amazon's recent announcement that it had earned a penny-per-share profit. The online retailer's stock shot up 24% on that news. Because of those kinds of anomalies, Edelman still won't recommend tech products to his clients. "This is endemic to the dot-com mentality and we don't see any change yet," he said.

Edelman fears that other financial advisers "continue to be members of the idea-of-the-day club." He says they may be so desperate to tell investors a success story during tough times that they will use the fourth-quarter tech bounce to reinvigorate interest in products that are still dangerous.

"Investors obviously have not learned their lessons and they are about to experience a repeat of Internet mania," he said. "We are shaking our heads at these fools."

Callahan, whose company runs Icon Tech, recognizes that "there is a late effect with investors," but he said those who focus too much on the horror that tech investors experienced in past years "are missing out on a new setting."

According to his theory, recovering sectors such as airlines, apparel, home furnishing and department stores foretell a broader economic recovery later this year. Technology is one of those sectors, he said.

That, in turn, has softened the market for technology funds, he said, making people more receptive again to the idea of investing in them. And he said his management team's emphasis on risk and its prudent approach to marketing the fund through financial advisers may ease investors' minds.

"We've never marketed for a short-term trading vehicle," Callahan said. "We mention it to people as a supplement to what they have."

It's likely, he said, that other firms will take a similar approach to marketing their tech funds as the sector recovers.

"There will be changes because the late 90s was a unique environment that I don't think we'll see again for the next 20 or 30 years," he said. "It was just a great, prolonged expansion. It's more normal to have changes in one- or two-year cycles. That's what we're in for."

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