SIZZLING sector funds.
WHEN TECH STOCKS TOOK OFF, EVE ALLEN, THE WIFE of the former L.A. Laker hoopster Lucius Allen and a marketing manager, thought they'd be a slam dunk. "I had over half of my portfolio in one technology fund," she says. "When technology stocks dropped last spring, I gave back a lot of my previous gains. Now, I'm reducing my holdings there and diversifying into other areas of the market."
At the same time, John Sargent has even more of his portfolio--around 70%--in sector funds, yet he's not feeling any distress. "Although my technology fund has gone down recently, my healthcare and biotechnology funds have picked up," says Sargent, who owns and manages real estate in Pine Bluff, Arkansas. "When some sectors are out of favor, others will be gaining."
The aforementioned examples illustrate that a red-hot sector fund can easily turn ice-cube cold or vice versa. The challenge is trying to figure out when to invest in a given fund or when to let one thaw. In 1999, for example, technology funds gained a stratospheric 136%, according to Morningstar Inc., the Chicago-based mutual fund tracking firm. These funds continued to rise during the first two months of this year but then experienced a reversal of fortune, losing 11% over the next six months. Healthcare funds, on the other hand, have gained a reputation for being market laggards for four consecutive years. But they staged a comeback as the vehicles of choice by posting an impressive 62% gain for the first three quarters of 2000.
To avoid being left out in the cold, we advise investors to use the following approach when they consider buying sector funds:
Look for balance. If you maintain a well-balanced portfolio that includes, say, large- and small-cap growth and value funds, you may want to add a market sector you favor to the mix. "You might tilt your portfolio toward technology, for example, if you think that area of the economy will produce superior gains," says Mark Balasa, a financial planner based in Schaumburg, Illinois. "Looking over your existing mutual funds, technology stocks might represent 30% of the assets in those funds, which is approximately the weighting of tech stocks in the S&P 500. If you want to boost the technology allocation to 35%, you could allocate an additional 5% through a technology sector fund."
Others like Gregory Duhon, a systems engineer with a Los Angeles-based Internet company, has concerns about whether too much technology will short-circuit his portfolio. "I know technology is the sector to be in for the long-term because virtually everything we do depends on technology these days," he says. "However, so much of my future is tied to technology, including stock options from my employer, that I want diversification in my portfolio. That's why I'm content with a 5% allocation in [a technology fund], while the rest is invested among many different industries."
One caveat: Balance is in the mind of the fund holder.
Seek out super sectors. Another approach is to arrange your entire portfolio so that your money goes into hot sectors you expect to excel. That's the strategy favored by Larry Waschka, the Little Rock, Arkansas-based financial planner who advises Sargent. "For moderately aggressive investors, I suggest they invest mainly in the economy's leading trends," he says. "That means dividing your portfolio among healthcare, especially biotechnology, as well as technology, telecommunications, and financial services. Some of my clients invest in these areas through individual stocks while others own sector funds."
Whether you approach sector funds as a side dish or the main course, you have to carefully peruse the menu. There are more than 300 entries from which to choose.
According to the experts polled by BLACK ENTERPRISE, the following are sector funds expected to blaze trails regardless of the vagaries of the market or the herd psychology of investors.
TECHNOLOGY FUNDS WILL REMAIN HOT BUT VOLATILE
Tech is here to stay. Expect software, networking equipment, and semiconductors to continue to spur an economy driven by productivity. Just be braced for that dreaded "v" word--volatility. Remember in November when tech stocks took a bashing? Across the board, these funds are still in recovery mode. But our experts fully expect such vehicles to stand the test of time.
Take Alliance Technology fund (ALTFX). This top-rated (five stars from Morningstar) tech fund ranks in the top 1% of all mutual funds over the past 10 years, returning more than 32.5%. In 1998 and 1999, returns were a whopping 63% and 72%, respectively. "In two years, my investment in this fund grew from $9,000 to $30,000, which was very exciting," says Allen.
Perhaps a bit too elated by the returns, she now admits: "I sold some stocks and moved the money into my technology fund, which made up 51% of my portfolio at that point."
Asserts Joe Haywood, her Los Angeles-based financial advisor: "She had too much exposure to that one fund. It's a good fund, but it's risky, as all tech funds are. I don't like to see clients' assets fall 20% in a short time period, so I generally advise a smaller allocation to sector funds, no more than 15% spread among a number of funds."
Another high-powered, diversified tech fund selected by our experts is Ivy Global Science & Technology (IVTAX). With more than 100 different holdings, its mix currently includes about 45% small- and midsize companies such as Tut Systems (Nasdaq: TUTS) and Cache-Flow (Nasdaq: CFLO), which complements the array of large-cap holdings. One investor who swears by Ivy is Dr. Alecia Davis-Townsend, an obstetrician-gynecologist in Houston. "Up until a few years ago I was reluctant to invest in stocks," she says. "However, I'd like to retire in about 20 years, or at least cut back so I won't have to make middle-of-the-night deliveries. I realized that I'd need a large retirement fund to make this possible, so I gradually moved my portfolio from cash into stocks. About 5% of my portfolio is now in this Ivy technology fund, because I think there will be tremendous opportunities in technology in the next several years."
Kemper Technology fund (KTCAX) is a tech old-timer that dates back to 1948. However, in this case, it pays to discriminate with age: the vehicle has a five-star rating and annual returns of more than 28% for the past 10 years. The fund has been powered by big-name, large-cap software, telecommunications, and networking stocks such as Oracle (Nasdaq: ORCL), Qualcomm (Nasdaq: QCOM), and Nortel Networks (NYSE: NT).
INVESTORS CATCH HEALTHCARE FUND FEVER
Healthcare funds are expected to offer the right prescription for those who focus on the long-term. One such fund that is expected to give investors a much-needed shot in the arm is Invesco Health Sciences fund (FHLSX), This fund emphasizes large pharmaceutical companies such as Pfizer (NYSE: PFE) along with biotech leaders such as Genentech (NYSE: DNA). "I like to recommend funds that invest in the companies I prefer as individual stocks," says Waschka. The fund was up 32% for the first three quarters of 2000 and scored an impressive return of 22% per year for the past 10 years.
Launched in 1997, Dresdner RCM Biotechnology fund (DRBNX) has been feverishly hot: After a 111% gain in 1999, this fund was up another 100% in the first three quarters of 2000. Not surprisingly, as of September 29, its latest 12-month return of 264% led all mutual funds for that period. With co-managers who are both medical doctors, the fund has been particularly prescient in identifying the most promising biotech opportunities.
John and Marian Sargent overwhelmingly approve of such performance. "We've been pleased with our sector funds," says Sargent, "and this biotech fund has been the best performer recently. With so much of our net worth tied up in real estate, my wife, Marian, and I wanted to diversify into other areas with stocks. Healthcare looks like it will be an important part of the economy, as the population grows older, and biotechnology in particular should be rewarding."
Jim Miller, who runs Miller Advertising and Promotional Products in Colorado Springs, Colorado, feels just as excited by the prospects of the healthcare fund he holds, Sun-America Biotech/Health 30 (SBHAX). Miller turned to his financial planner, Richard Peace, who recommended this fund. "It's small, it concentrates on a few favored companies, and it's team-managed," Peace says, "all of which I prefer. I don't recommend a huge weighting in sector funds, but I think that biotechnology is so promising that an aggressive investor could put 10% to 15% of [his or her] portfolio here to add some `juice' to overall performance."
TELECOMS ARE HOT-WIRED FOR SUCCESS
This is another sector favored by Waschka, who believes such funds will cash in on a coming boom in wireless communications as it continues to mesh with Internet services. Invesco Telecommunications (ISWCX) is a five-star fund that knows when to hold winners and when to fold 'em. The strategy works: The fund has produced a dazzling 42% annual return over the past five years. Fund manager Brian Hayward sharply cut back his stake in Finnish cell phone-maker Nokia (NYSE: NOK) last spring after some worrisome results from Europe. Shortly thereafter, Nokia's stock plunged after a warning about third-quarter results.
INVESTORS TAKE FINANCIAL SERVICES TO THE BANK
Baby boomers are heading into their pre retirement years, which is placing a huge demand on financial advice--and solid profits for the purveyors of that advice. Such funds as Davis Financial (RPFGX) will take advantage of this environment. (As the past year indicated, keep in mind that such funds are prey to an interest rate-sensitive environment). But despite the recent climate, Davis Financial has an excellent track record, thanks to a mix of bank, brokerage, and insurance company stocks. Co-manager Kenneth Feinberg says he prefers to invest in companies after they have intimate knowledge of a company's management team and believe the business model will maximize shareholder value. Maintains Feinberg: "We're not after 90-day winners; we're long-term, low-turnover, tax-efficient investors."
Another fund, John Hancock Financial Industries (FIDAX), was designed to capitalize on the pending wave of mergers among financial institutions. The fund spreads its bets among a variety of firms, including European holdings that are considered likely takeover targets. "The manager is experienced in this area," says Scott Cooley, senior analyst of Morningstar.com, "and there is a deep staff of analysts. This fund can be expected to do well over the long haul."
REAL ESTATE FUNDS HOUSE HOT RETURNS
"I suggest a real estate fund as an inflation hedge for my clients," says Earl J. Romero, a New York-based accountant and financial planner affiliated with H.D. Vest Financial Services in Irvington, Texas. "If inflation fears pick up, stocks may not do well, but real estate might gain value. Investing 3% to 5% of your portfolio in this type of fund may provide a valuable offset."
He recommends Cohen & Steers Realty Fund (CSRSX), which invests primarily in real estate investment trusts (REITs) that hold commercial properties, so investors become property owners. REITs sagged in 1998 and 1999 while the rest of the stock market soared. As a result, Cohen & Steers Realty lost 18% in 1998 and returned less than 3% in 1999. "In my system, investors rebalance their portfolios to maintain their asset allocation," says Romero. "Thus, when REITs went down, more money was invested into real estate funds."
Says Mel Jackson, a healthcare sales representative in New York City, "I thought Earl's buy-low strategy made sense, so I put more money into this fund while it went down. That's paid off this year." With REITs rebounding, Cohen & Steers Realty returned 22% in the first three quarters of 2000.
Not all real estate funds invest in REITs: Longleaf Partners Realty Fund (LLREX) invests in real estate operating companies like developers and hotel chains. "Long-term, you may have more upside potential with a real estate operating company," says Gerard Breitner, president, Excomp Asset Management in New York. "Longleaf has an excellent record as a long-term value manager."
C.T. Fitzpatrick, the fund's lead manager, says that "publicly traded real estate has done exactly what it's supposed to do, which is to provide portfolio diversification. Altogether, real estate will help investors in the long-term, which is how these securities should be held."
So how should you approach these types of funds? Keep in mind that some sector funds can diversify your portfolio, while others rev up your returns. Yet another option is to build your entire portfolio around sector funds, which may be a savvy solution if you can pick torrid segments of the market and stay out of mutual fund Siberia.
DRIVE THESE 10 VEHICLES TOWARD GREAT RETURNS
SECTOR FUND TICKER Technology Alliance Technology ALTFX Technology Ivy Global Science & Technology IVTAX Technology Kemper Technology KTCAX Healthcare Dresdner RCM Biotechnology DRBNX Healthcare Invesco Health Sciences FHLSX Telecoms Invesco Telecommunications ISWCX Financials Davis Financial RPFGX Financials John Hancock Financial Industries FIDAX Real Estate Cohen & Steers Realty CSRSX Real Estate Longleaf Partners Realty LLREX 1-YEAR FUND TOTAL RETURN(*) Alliance Technology 50.09% Ivy Global Science & Technology 69.08 Kemper Technology 74.45 Dresdner RCM Biotechnology 263.88 Invesco Health Sciences 46.97 Invesco Telecommunications 74.47 Davis Financial 32.94 John Hancock Financial Industries 41.93 Cohen & Steers Realty 26.51 Longleaf Partners Realty 7.39 AVG. ANNUALIZED TOTAL RETURN FUND 3-YEAR 5-YEAR Alliance Technology 34.45% 27.8% Ivy Global Science & Technology 40.45 N/A Kemper Technology 43.15 33.55 Dresdner RCM Biotechnology N/A N/A Invesco Health Sciences 23.98 22.99 Invesco Telecommunications 54.35 42.49 Davis Financial 15.34 23.49 John Hancock Financial Industries 12.13 N/A Cohen & Steers Realty 1.58 12.16 Longleaf Partners Realty -5.66 N/A MIN. INIT. FUND PHONE INVEST. Alliance Technology 800-227-4618 250 Ivy Global Science & Technology 800-456-5111 1,000 Kemper Technology 800-621-1048 1,000 Dresdner RCM Biotechnology 800-726-7240 5,000 Invesco Health Sciences 800-525-8085 1,000 Invesco Telecommunications 800-525-8085 1,000 Davis Financial 800-279-0279 1,000 John Hancock Financial Industries 800-225-5291 1,000 Cohen & Steers Realty 800-437-9912 10,000 Longleaf Partners Realty 800-445-9469 10,000 NET ASSETS (in millions FUND of millions) Alliance Technology $4,349.6 Ivy Global Science & Technology 56.5 Kemper Technology 3,932.2 Dresdner RCM Biotechnology 560.9 Invesco Health Sciences 2,052.5 Invesco Telecommunications 4,018.2 Davis Financial 563.4 John Hancock Financial Industries 706.2 Cohen & Steers Realty 1,193.5 Longleaf Partners Realty 619
SOURCE: MORNINGSTAR INC.
(*) SEPTEMBER 30, 1999 - SEPTEMBER 29, 2000
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|Author:||KORN, DONALD JAY|
|Date:||Feb 1, 2001|
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