Finding The Best Mutual Fund Concentrating In Technology Stocks

echnology stocks are volatile. That makes finding the right mutual fund investing in technology stocks no easy matter - these mutual funds are volatile too. But, investors (who can stomach the risk) should approach the selection process this way: consider the risk assumed, and the return received, on a historical basis. Then compare that risk and return to the risk and return of other mutual funds in the same category. The best mutual fund is the one that assumes the least risk and gives investors the greatest return.

To determine the "best" technology mutual fund, we utilized our proprietary research database from Morningstar (data current as of 3/31/99). We searched for specialty mutual funds, investing in technology companies, which have the lowest risk and the highest return.

First, and not surprising, we were able to find only one mutual fund, with "low" risk, worth considering. That fund is the Dresdner RCM Global Technology Fund. Readers should note that it is a small fund - only about $24 million in assets (as of 3/31/99). However, the fund has existed since December, 1995, Morningstar gives it a "5 star" rating, and its return is "high". The fund (as of 2/28/99) had 22% of its assets in cash and 14% in non-U.S. technology stocks. Though the fund is "no-load", it carries a rather high expense ratio of 1.75% (owing to its small size). That expense ratio should decrease as the fund grows larger.

Otherwise, our search uncovered no other technology funds, with "low" risk, worth considering. For example, we found the Monterey Murphy New World Technology Convertibles Fund (managed by the well-known investment newsletter writer and speaker) and the Seligman Henderson Global Technology Fund. While both funds had "low" risk, they did not have enviable performance. The Monterey Murphy fund (which invests the bulk of its assets in convertible securities, not stocks) had a return rating of "low". Likewise, the Seligman Henderson fund had "below average" return.

Our next search modified the criteria, so that the risk rating was not "low" but instead "below average" for the technology category. This search discovered three mutual funds worth considering - two from the Fidelity fund family and one from the PIMCO fund family.

First, the PIMCO Innovation fund is a contender. Its $200 million in assets makes it flexible, and its portfolio holds 37 stocks. It receives a "5 star" Morningstar rating, and its return is "above average". The fund's manager adds a great deal of value, as measured by the fund's "alpha". Compared to the risk and return of the Wilshire 4500 (which is the most suitable comparison for this fund), the manager has an alpha of 20 - well above most fund managers. On the downside, the fund is a load fund - charging 5.50% -- and the fund carries an expense ratio of 1.31%.

The first of the Fidelity funds, Fidelity Select Software, boasts a manager who likewise has a high value added - or alpha of 14 - as well as a Morningstar "5 star" rating, and "above average" return. A much larger fund than the previous two, it has assets of over $700 million. It has a front-end load, but only 3%, and an expense ratio of 1.42%.

The second Fidelity fund is the Fidelity Select Technology Fund. It is more than twice the size of Fidelity Select Software, with $1.6 billion in assets. Another "5 star' fund, with "above average" return, this fund's manager adds the most of all considered - with an alpha of 21. On the downside, the manager trades frequently; he turns over the $1.6 billion in assets 5 1/2 times a year. This adds to expenses. But, so far, the returns are superior. Since 1989, the fund's average annual return has been 27.54%, compared to the category's return of 25% and the S&P 500's return of 19%. The fund's 1998 return was 74%. But in 1997 the fund's 10% return trailed the return of the S&P 500 by nearly 23%. It has a 3% load and carries an expense ratio of 1.3%.

Overall, for investors who can stomach the risk of technology investing, these mutual funds are worth considering.

Sponsored by James J. Eccleston. This Web site contains material of general interest. It is neither intended to, nor constitutes, either legal advice or investment advice.
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