High-Tech Funds Soar, but Can Also Sour

Investing is a like visiting an amusement park: There's something for everyone.

The safety-minded can hop on the merry-go-round. Thrill-seekers head for the big roller-coaster. High-tech mutual funds definitely fall in the latter category.

These specialized funds rise steeper and fall deeper than almost any other sector of the market. Do it right and you can eat all the cotton candy you want.

High-tech investors are up to their ears in the pink stuff just now.

The third quarter, which ended Sept. 30, started off badly as a few key companies, especially giant Intel Corp., announced they would not meet Wall Street's quarterly earnings projections. But the sector came zooming back as personal-computer (PC) stocks climbed.

Funds that invested in PC-makers Compaq and Dell, for example, saw those stocks nearly double in three months. As a whole, high-tech funds notched an impressive 19 percent return, according to Lipper Analytical Services. That's the second highest, after micro-cap funds, of any fund category and about 150 percent ahead of equity index funds for the quarter.

"It's actually one for your dreams," says Adam Hetnarski about the quarter ending Sept. 30. As manager of the Fidelity Select Technology Portfolio (800-544-8888), one of six Fidelity high-tech funds, he was surprised by the sector's strength. "I would not have expected the quarter to do as well as it did."

The fund is up about 39 percent for the year, a move that parallels the small-cap funds, in part because so many technology stocks are small caps.

But upward moves are only part of a roller-coaster ride. High-tech funds can also to fall more steeply than the rest of the market when the news turns bad. So if you're going to invest in the sector, make sure you're ready for big price drops.

There's "definitely the possibility for a fund to be down 10 to 20 percent in a given quarter," says Rod Berry, co-manager of the Robertson Stephens Information Age Fund (800-766-3863), a pure high-tech fund based in San Francisco. "That should not be a huge surprise."

For example, Mr. Berry's own fund fell 12 percent in the first three months of the year, rose 18.5 percent for the next three, and gained an eye-popping 31.7 percent for the quarter just ended. To be successful, high-tech investors should hang on for the long term, analysts say.

"This is one area, if you're an equity investor, you have to jump on and stay on," says Gerald Perritt, portfolio manager for the Perritt Capital Growth Fund, based in Chicago. "The problem with this technology revolution is that there are a lot of casualties.... And you just don't know which companies those are."

Investors should either follow the news closely when they pick their high-tech portfolio or rely on fund managers to do the stock-picking, financial advisers agree.

Berry of Robertson Stephens is upbeat about makers of PCs, semiconductors, and semiconductor equipment. He also likes wireless telephony, not so much the companies that make the cellular phones but those that build the networks. He is particularly bullish on Nokia, the Finnish manufacturer that is the strongest player in building Europe's burgeoning wireless network.

Mr. Hetnarski of Fidelity is also upbeat about PC, semiconductor, and semiconductor-equipment stocks. He is also investing in communications technology, though more broadly than Berry because of telephone deregulation around the world.

A few factors could upset their bullish expectations for technology. Hetnarski sees a hiccup if PC earnings don't meet expectations. Berry worries the Federal Reserve will raise interest rates.

"There is always risk in investing in this area," Berry says. "But we think the long-term fundamentals - the global spread of technology - are one of the big drivers here."