After Some Dicey Days, What's Ahead for Tech Funds?

As any calm and patient investor in mutual funds will tell you, last month's commotion in the stock market was nothing to get agitated about.

Well, maybe just a little agitated. A couple of moments there got pretty dicey -- that day in early April when the Nasdaq Composite Index was down 13 percent by lunchtime, for one.

And you couldn't help noticing that "technology" funds as a group, all 170 of them, fell more than 30 percent in a few weeks after April Fool's Day.

But salty long-term fund investors pride themselves on their ability to ignore the short-term waves and concentrate on the tide. If this makes them seem dull and slow-witted at times, so be it.

You don't need to step back very far to see their point. Consider the fund performance numbers for the year to date, a four-month period that managed to make room for both a boom and a bust in computer, telecommunications and biotechnology stocks. Net effect: Amazingly little.

Of the 29 categories of funds tracked by the research firm of Lipper Inc., only one shows either a gain or loss of more than 10 percent since Dec. 31. That one -- down 20 percent -- is gold funds, now so tiny it almost doesn't count.

Next you have the always-jumpy emerging markets stock funds, down 9 percent. Beyond that, nothing else stands more than 8 percent either way from where it began the year. No, not even those technology funds, which have emerged from all their gyrations with a 7.6 percent net gain.

Among individual funds, the two giants of the industry, the $109 billion Fidelity Magellan Fund and the $107 billion Vanguard 500 Index Fund, have each moved less than 1 percentage point.

Stretch the measuring tape out further, and the darlings of the bull market still look beautiful. The Bloomberg average of technology funds has gained 95 percent in the past year; 59 percent a year for the past three years, and 38 percent a year over the past five. For that sort of reward, a scary spell now and then is a small price to pay.

"Most technology investors understand that this is a rapidly changing, volatile environment," says Bruce Bartlett, who manages about $12 billion in stocks for several funds in the $123 billion Oppenheimer Funds Inc. group. The firm recently added to its lineup the Oppenheimer Emerging Technologies Fund, which Bartlett says will emphasize Internet-related telecommunications innovations.

Despite the recent pummeling high-tech stocks have taken, the evidence looks as strong as ever that the Internet is an economic powerhouse.

"Over the next five years, the consensus forecast is that tech earnings will rise 25 percent per year, on average," says Edward Yardeni, chief economist at Deutsche Bank Securities Inc. "If long-term earnings are on target, then e-economy stocks are not as overvalued as the price-earnings ratios (still above 40 to 1 on average) would suggest."

P/Es over 40, eh? That's double what is traditionally considered a generous value to put on a company's earnings. On that basis, the high-fliers could easily take another nosedive at any time.

Absolutely. Or if they don't, they could subject their fans to a much longer period than four months of no net progress, to give earnings more time to try to catch up with the stocks.

That's why those cloddish, oh-so-boring long-term investors stay diversified, keeping some of their money staked on technology and some on other, less glamorous stuff.

They have stuff like balanced funds, equity income funds, even (gasp!) bond funds, which have been scorned all through the Internet mania. The Bloomberg average of 3,600 bond funds has eked out a 0.8 return so far in 2000, while avoiding the histrionics in stocks.

Chet Currier is a columnist for Bloomberg News.