5 Great Tech Funds Without Loads
Add spice to your portfolio with these top-performing no-load mutual funds that focus on technology stocks.
It’s a good time to invest in technology stocks. With the U.S. economy picking up steam and other developed countries holding their ground, tech companies should be able to deliver solid growth in the coming years. As a result, “the returns to investors could be quite, quite high,” says Walter Price, a co-manager of Wells Fargo Advantage Specialized Tech Fund.
Moreover, we’re still not halfway through a four-month stretch that historically has been a good period for owning tech stocks. In six of the past seven years, the Nasdaq 100 Technology index has outpaced Standard & Poor’s 500-stock index from November through February. Dan Wiener recently wrote about this—he calls it the “Tech Winter”—in his newsletter, The Independent Adviser for Vanguard Investors. During this period, Wiener says, “well-chosen tech stocks traditionally post some of their best market-beating numbers.” Much of that is driven by a year-end “use-it-or-lose-it” mindset at big technology buyers. And ahead of new-product launches, tech companies typically offer discounts on older products at this time of year, and that spurs more buying.
The operative words, though, are “well-chosen tech stocks.” That’s where smart, experienced mutual fund managers come into play. Below, we name our five favorite no-load tech funds. (Returns are through December 18.)
Though they come from the same fund company, Fidelity Select Electronics Portfolio (FSELX) and Fidelity Select IT Services Portfolio (FBSOX) differ dramatically. Select Electronics, which Steve Barwikowski has run since 2009, focuses on the semiconductor industry and the end markets it serves, including computer companies and cell-phone makers. The fund holds many of the industry’s major players, including Korea’s Samsung Electronics (the world’s second-largest semiconductor company) and Intel (the computer-chip juggernaut).
The subsector’s boom-and-bust cycles are shorter and less severe than they once were, says Barwikowski. But he still spends a lot of time figuring out where we are in that cycle and then picking stocks for the portfolio accordingly. Barwikowski is at heart a value investor, so if the semiconductor cycle is hitting bottom (an abundant supply of chips and low demand for such products), then he’ll likely buy stock in small companies on the cheap. At the peak of the cycle, when chip demand is high, he’s more likely to buy shares in large, dividend-paying companies with steady profits. Currently, Barwikowski says, it’s “Goldilocks time: It’s not too hot and it’s not too cold.” Demand is good, and inventories are lean but not too lean.
At last word, the fund had about 80% of its assets in semiconductor makers, distributors and chip-equipment makers. About 10% was in electronic equipment makers, such as Audience Inc., which makes products that improve voice quality in mobile devices. The rest of the assets are split among Internet firms, including Amazon.com and Google, as well as software and computer hardware businesses. The fund holds 68 stocks.
This fund has been a touch more volatile than the typical tech fund over the past five years. But since Barwikowski stepped in as manager, it returned 25.4% annualized, outpacing the typical tech fund by an average of 4.6 percentage points per year.
Select IT Services holds what manager Kyle Weaver calls “stodgy and unsexy” companies. That’s because, he says, he focuses on “businesses that help other businesses use technology to solve their problems.” It’s a wide net, as it turns out. But these firms – Visa and MasterCard are among the fund’s top holdings – can prosper in almost any kind of economy and can survive almost any technological advances that may be affecting their industries. Apple Pay, Square and PayPal may be revolutionizing how people pay for goods and services, but Visa and MasterCard, says Weaver, are “still the rails on which all of those transactions will take place.” Moreover, he says, “it’s nice to invest in a subsector that is a little bit immune to innovation.”
Weaver ran an IT services fund for another firm, RiverSource Investments, before joining Fidelity in 2008. From the time he stepped in as manager of Select IT Services in February 2009 (a month before the start of the great bull market), the fund earned a 25.2% annualized return, an average of 4.4 percentage points per year better than the typical tech fund.
Red Oak Technology Select (ROGSX) is the smallest fund among our favorites, with just $148 million in assets. Its parent firm, Oak Associates Funds, is based in Akron, far from major tech or finance centers. But Red Oak is still a winner. From the time Mark Oelschlager took over as manager in April 2006, Red Oak returned 10.7% annualized, an average of 2.8 percentage points per year ahead of the typical tech fund.
Some tech investors try to identify the next hot story or the fastest-growing companies. Not Oelschlager. “High-growth companies and companies with exciting stories do well for a couple of years, and then they flame out,” he says. So he focuses on tech companies with sustainable profits and good competitive positions within their industry that trade at bargain prices. “We’re trying to identify companies that will be around for a long time and make a lot of money for a long time.”
To build his portfolio, Oelschlager hews closely to three core principles: First, he takes a long-term view. Second, he keeps the portfolio to 25 to 40 stocks at any given time (the fund held 38 stocks at last report). Finally, he stays fully invested. If he finds a new company he wants to invest in, he has to sell a current holding to make room for it. That said, when he buys, he tends to hold. The fund’s turnover rate is 15%, which implies that holdings stay in the fund for nearly seven years, on average. By contrast, the typical tech fund turns over its portfolio at least once a year. The fund’s top holdings at last report were Cisco Systems, Northrop Grumman and Oracle.
You won’t see many of the grande dames of tech among the 69 stocks in T. Rowe Price Global Technology (PRGTX). “I don’t own IBM, Hewlett-Packard, Samsung Electronics and SAP,” says manager Joshua Spencer. That’s because he approaches this sector with the view that technology is about change and innovation. “It’s a winner-take-all kind of market,” he says. “It pays to invest with the winners, and we try to bet on the right side of change.”
Some of the winners he has bet on are well-known, and others are not. Amazon and Google, for instance, are among his top holdings. So are Tencent Holdings, a Chinese company that owns Internet and mobile businesses, electric carmaker Tesla, and Zillow, the real-estate data firm. What ties them together: They each play a unique role in revolutionizing their industry. “They each do something no one else can do as well as they do, and they’re gaining share, and they have a strong competitive position,” says Spencer.
Spencer says he and his team of 20 analysts do “deep field research” on companies in the U.S., Asia and Europe to find good ideas. The process has won results: Over the past 10 years, the fund tops the charts of all tech funds, with an annualized return of 13.4%. That’s an average of 4.6 percentage points better per year than the typical tech fund. And considering how volatile tech stocks can be, the fund has been remarkably consistent. Except for one instance, in each of the past 11 calendar years (including so far in 2014), the fund ranked among the top 37% of its peers or higher. (The exception was in 2007, when the fund’s 13.4% return lagged the typical tech fund by 2.7 percentage points.) Though Spencer’s tenure as manager goes back only 2.5 years, he has been a key analyst with the fund since 2005. Since he became manager in June 2012, his fund returned 28.0% annualized, beating the typical tech fund by an average of 5.7 percentage points per year.
Walter Price and Huahua Chen, the managers of Wells Fargo Advantage Specialized Technology (WFTZX), break the portfolio into three groups. The first group consists of companies that have prospective near-term annual earnings or revenue growth of at least 50% and that could be “the next breakthrough company,” says Price. Facebook, Tesla and Palo Alto Networks, a network-security firm, fit in this category. The second consists of growing companies trading at reasonable prices. Among them are Google and SunPower, a maker of solar panels. The third category includes undervalued companies with a catalyst to spur growth, such as Microsoft and Alcatel, a maker of telecommunications equipment.
The managers also have a rigorous process for selling. They assign one-year and two-year price targets for each stock in the portfolio (the fund at last word held 65 stocks). If a stock hits its shorter-term target, the managers start to trim their shares. Once it hits its longer-term target, they unload the position outright. In 2013, they sold their holdings in high-flying stocks, such as Pandora and Yelp, both of which registered triple-digit gains that year. Those moves, says Price, helped lift the fund to a 42.9% return in 2013, a whopping 7 percentage points better than the typical tech fund. The fund’s long-term record is strong, too: Over the past 10 years, it earned 10.4% annualized, an average of 1.7 percentage points better than the typical tech fund.