Diversification in Tech Stocks Still Winning Strategy.

As investing in high-technology stock mutual funds has turned less rewarding this year, it has also grown more complicated.

If you were pinning your hopes on tech funds as a shortcut to Easy Street, that second development may come as even worse news than the first. Though the hull market may revive, the simple days of New Age investing are gone and they are never coming back.

As the information economy grows up, "tech" is no longer a specific investment approach. Questions like what kind of tech fund you buy, and from whom, now can make all the difference.

In the midst of one of the greatest investment booms ever, the Bloomberg average of 255 computer and telecommunications "technology" stock funds has averaged a 40 percent annual return over the past three years. This year to date, by contrast, it has dropped 6 percent.

But that's only the beginning of the story. Hark back for a moment to the fourth quarter of 1999, when just about all funds with the word "technology" or "Internet" in their names were climbing together. Now, when you look at a table of those same funds' performance this year, they're all over the place.

Ten tech stock funds have gained 15 percent or better year-to-date, paced by the Red Oak Technology Select Fund, up 53 percent, and the Firsthand Technology Value Fund, up 30 percent. Both have excelled lately by steering clear of electronic retailing stocks such as Amazon.com Inc., whose shares have fallen 61 percent since New Year's Day.

Nuts and boils

Instead, they have focused on shares of behind-the-scenes companies providing the nuts and bolts, the so-called infrastructure, of the Net. One of Red Oak's 10 largest holdings at last report, Network Appliance Inc., has more than tripled this year. Both Red Oak and Firsthand Tech Value have been big investors in telecom systems provider PMC-Sierra Inc., which has more than doubled.

At the bottom of the tech-fund rankings, you find names like the Potomac Internet-Plus Fund and the ING Internet Fund, down 55 percent and 44 percent, respectively. A big holding at ING Internet: Doubleclick Inc., the Internet advertising firm, down 89 percent year-to-date.

To separate winners from losers in this volatile environment, it's no longer enough to pick a savvy manager. The same firm that manages Firsthand Tech Value also runs the Firsthand Technology Leaders Fund, up 4 percent this year; the Firsthand Technology Innovators Fund, down 2 percent; the Firsthand Communications Fund, down 12 percent; and the Firsthand E-Commerce Fund, down 25 percent. How's that for variety?

"We started out with a one-size-fits-all product (TechValue, in 1994)," Firsthand Funds' co-founder and portfolio manager Kevin Landis says. "But we found different investors wanted different things from us."

Simple system

Landis says he invests his own money in all six funds by deduction from his paycheck each month. Interesting, isn't it, to find big wheels using ordinary, unsophisticated money-management techniques like that? Maybe they really work.

But let's say your investment plan doesn't have room for six different funds in this single specialty. You could stick with a past winner like Firsthand Tech Value, hoping that history will serve as a guide to future success.

You can insist on a tech fund with widely diversified holdings among the standard categories of technology, media and telecommunications.

"Within the sectors there are different cycles," says Jacob Rees-Mogg, who helps manage the $350 million Eaton Vance Information Age Fund, which is down 12 percent this year but has averaged a 21 percent annual gain over the past five years.

A long-term perspective helps. "The big technology trends haven't changed from last year to this year," Landis says. "There's a pendulum swinging between fear of owning technology and not owning it. Investors will always be ambivalent about the most exciting opportunities, because they're new."

Chet Currier is a columnist for Bloomberg News.

Here's a sad fact about stock mutual funds: They do not naturally get better with age. Too often a stock fund's vigorous youth gives place to a fat, sluggish maturity. Indeed, the healthier it proves in its early life, the tougher a fund may find it to maintain its mobility and muscle tone as the years go by.

Bigger Funds May Lose Their Vitality

Sound like some people you know? We could call it OFS, or Oakmark Fund Syndrome, after the standout new fund of 1992 and 1993 that wound up trailing the Standard & Poor's 500 Index by 61 percentage points from the end of 1997 to the end of 1999. In its youth, a fund may shine as a result of a few alert, or lucky, investment moves, which it can make without attracting undue attention.

But each success brings in more money from investors, and the next thing you know the little whippet is a hulk.

A jump into some unrecognized stock or a hot new issue no longer gives the juice it once did td the bottom line. The manager must deal in bigger and bigger quantities of stock, with correspondingly less ability to buy and sell at favorable prices. As it grows in a friendly investment climate, a fund also accumulates a debt of sorts to Uncle Sam. Increases in the value of securities bought in years past, and still held in the portfolio, bring with them unrealized capital gains which will blossom into a tax obligation when the position is ultimately sold.

To avoid this kind of backlog, even an index fund set up to match the performance of a market measure such as the Standard & Poor's 500 Index may be a shade more desirable to buy when it is young than in later years.