Vista Opens Window to Tech-Sector Boom

Equity funds investing in technology, telecom, and media sector performed well in the fourth quarter of 2006 on the back of robust growth in mid-cap and small-cap stocks....

Jessy Yang 26.01.2007
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Equity funds investing in technology, telecom, and media sector performed well in the fourth quarter of 2006 on the back of robust growth in mid-cap and small-cap stocks. Strong performances of telecom and media sectors also helped some tech funds do well.

The average tech fund rose 12.6 percent in 2006, according to data as of Dec. 29 from Morningstar Asia. Notably, around 60 percent of the gains came on the back of a 7.63 percent fourth-quarter advance. That result also kept tech funds in positive territory over the past three years. However, on average the performance of Tech funds lagged other sector funds such as real estate and financial stock funds.

Last October Microsoft issued the final tes

t version of its new Windows Vista operating system. In the meantime, Microsoft announced its retail launch to be within January, 2007. The release of Windows Vista operating system helped boost tech sector as many peripheral manufacturers and software developers expected to benefit from updating PC system by consumers. As a matter of fact, the launch of Windows Vista as well as other new products including Apple's iPhone coming on stream is expected to ensure that the demand for consumer electronics-related companies will remain healthy and strong.

Increasing demand for technology goods and services from emerging markets is another driving force for tech sector. In 2006, about 45 percent of all personal computer sales came from developing countries, according to Edmund Harriss, co-manager of the Guinness Atkinson Global Innovators fund. Some names from emerging economies in the technology sector are drawing great attentions from international fund managers due to their strong performance over past few years. Among them include Taiwan's hardware manufacturer Hon Hai Precision and Indian's software service provider Infosys Technology.

Telecom sector in some emerging economies also posted strong growth in 2006 and is poising for further growth in 2007. India's telecom sector has witnessed an exponential growth of 50 percent this year. A similar growth can be seen in China. According to China's Ministry of Information Industry, the total number of telephones has increased from around 744 million as on Dec 31, 2005 to 825 million as on Nov 30, 2006, where the share of wireless phones was around 55 percent.

Looking forward, tech funds will benefit from favourable product life cycles in 2007. Investors can gain from a possible tech rebound by sticking with high-quality diversified funds. For those looking for tech fund, we opt for those spreading their assets across emerging names, established blue chips and value plays. In addition, such funds should generally keep themselves reasonably well diversified across subsectors and market-cap bands.

Janus Global Technolgy, co-managed by Brad Slingerlend and Barney Wilson since last February, posted a 6.78 percent return for 2006. This fund is a global portfolio, with about a third of its assets outside the U.S. It is diversified by market cap, too, with nearly half its assets in mid- and small-cap stocks. Its global approach gives it a wider reach than many tech funds have. For example, the fund's investment in one Chinese solar-panel maker, Suntech Power Holdings, proved to be a good choice. However, its relatively underperformance in 2006 made new management team's approach to be proven.

Franklin Technology fund, managed by J.P. Scandalios, is a US concentrated portfolio. As of end of November, it had around 83 percent of its assets in the US. Management diversified the portfolio through sector positioning. It had around 34 percent of assets in Software, 29 percent in Hardware, and 23 percent in Telecom sectors as of end of November. Stock selection was one of the largest drivers of relative outperformance in recent quarter. The top holding of the portfolio, Cisco Systems, has gained around 60 percent in 2006, contributing positively to the Fund's performance.

Investors should be aware of the risks associated with technology funds and its penchant for wild performance swings. After the technology fund posted a dazzling average return of 128.3 percent in 1999, it generated double digit losses for next consecutive three years (-37.3% in 2000; -21.5% in 2001 and -35% in 2002). Technology fund, by its nature of focusing on specific sectors, carries more risk than funds spread across a large number of industry sectors and can lead to greater volatility. In addition, it is exposed to risks of the short product cycles and intense competition.

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Jessy Yang  Jessy Yang is a research director with Morningstar Asia.

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