Those saying technology will lead the way out of the bear market, may only be half right, even if what they anticipate actually comes to fruition.

While specialty-technology funds have been producing surprising returns so far this year, those leading the charge are largely composed of only peripheral or quasi-technology stocks.

Nonetheless, they are making their mark. As of last Thursday, specialty-tech funds were up collectively 3.7% year-to-date, a dramatic improvement over the negative 34.7% return in the trailing 12 months. It is also a marked improvement over the negative 42.5% annualized average return of the trailing three years and negative 6% over the past five years.

Zeros To Heroes

"I have always said over and over, tech is going to lead us out of this recession," said Bill Seale, principal and director of portfolios at ProFunds. "Tech stocks got pummeled as the market went down, but what has happened is a recovery in the tech sector. I believe we are in a recovery, and we will see a continued recovery."

ProFunds Ultra Internet fund is currently the second-largest percentage gainer in this specialty-tech category since the start of 2003, but the kingpin of the group has been the Amerindo Technology Fund. With a mere two-star Morningstar rating, the Amerindo Technology Fund has produced a 28.5% return so far this year. While losing 4.5% over the last year, it still beat almost all of its peers in that time.

"It was our view that after 9/11, business people would be reluctant purchasers, so we allowed the portfolio to skew to companies where the ultimate consumer of the product was the individual rather than a corporation," said Michael Sandifer, a member of Amerindo's investment committee.

"When company budgets are a pretty good size and growing, the traditional techie businesses do well, but the economic environment has not been conducive to that," Sandifer said. He pointed out that in search for short-term performance, the fund has stocks such as Expedia and eBay in them. eBay, a Web-based auction forum, makes up more than 22% of the fund's portfolio and the stock has gone up 14.1% so far this year. Likewise, Expedia, which is really a travel business that uses the Internet as its medium, is up 2% for the year and comprises nearly 17% of the fund.

Internet portal Yahoo! is in the fund and even, which is a retailer, or e-tailer as some have labeled it, makes up 4.2% of the portfolio and has produced a stellar return of 14.5% year-to-date. " at its core is a retailer," said Chris Traulsen, a senior analyst at Morningstar. "It just has a different distribution than brick-and-mortar companies. Expedia is a travel agent," he said.

Traulsen said the fact that companies like this are included in tech funds can lead to a philosophical difference on what is even considered tech these days. "One can make an argument for Amerindo Technology not being strong into tech," Traulsen said. "People associate all things Internet with technology, but a lot of the better-performing [technology] funds are heavy in consumer-related Internet holdings."

A number of the funds at the forefront of this group have similar quasi-tech holdings like those in the Amerindo fund. ProFunds Ultra Internet fund also holds ebay, Yahoo! and, each comprising 5% or more of the fund. It also consists of WebMD, a provider of transaction and information services for the healthcare field, as well as Ameritrade Holding, the discount securities brokerage, and E*Trade, the online financial services provider. ProFunds' Seale said that while it appears this could be the foundation of a recovery, there is no sure way to tell whether the recent rally is the real deal, or just a matter of bottom feeders picking up cheap stocks to make quick gains. It could even just be a symptom of the sector being pushed down for so long it was due for a positive run. It is a question Seale and his peers have been asking themselves for weeks.

Not all of these funds are primarily made up of these kinds of general consumer stocks. In fact, a number still invest, true to their mandate, in tech standbys, such as Intel or Microsoft.

Traulsen is not so sure tech will lead the way. In fact, he is not as optimistic about this being the climb out of the basement for the sector.

"Until corporations start spending on IT, there's not a lot of optimism out there. So much wealth has been destroyed, it makes sense that sector has to start doing better," Traulsen said. "My feeling is that people need to approach this sector with caution. While it's tempting to try and time things like this, it's really, really difficult.

"I would also be wary of funds that are at the top now or at the top last year. [Plus], a lot of funds did well because they had 30% to 40% in cash, [avoiding] exposure to technology."

Copyright 2003 Thomson Media Inc. All Rights Reserved.


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