Sector Funds

Regardless of war or recession, there will always be some industries whose fortunes are rising or are on the verge of such turns. Last year, health care was red-hot. Lately, technology stocks have soared. But when investors try to make bets on individual industries, they find themselves confounded by the question of which stocks to buy--or by the mechanics of building such a focused portfolio.

More than a decade after the dot-com bubble burst, technology stocks are once again the rage on Wall Street. Shares of companies specializing in social media, mobility, cloud computing, data analytics and location-based e-commerce have surged as much as 60% this year. And fund managers say the stocks have more room to run as demand builds for a new generation of smartphones and other products offering round-the-clock connectivity. Investors are especially excited about the fast revenue growth - and actual earnings - that many companies have achieved despite their relative youth.

Sector mutual funds are notorious for being poorly diversified and risky, which probably explains why a lot of investors don't use them. But the funds aren't so bad if you use several at once, suggests a new study by Morningstar Inc. of Chicago. Sector portfolios are unusual types of mutual funds that target a single industry--be it the utility business, gold mining or whatever. Some industries, such as technology and health care, are quite broad.

Gov. Arnold Schwarzenegger's $222-billion infrastructure improvement plan for California has the potential to transform the region's antiquated rail system, which has become increasingly congested with freight and passenger traffic. Southern California's railways remain a relic of the pre-World War II era even as the region has become one of the world's top gateways for goods in the 21st century.

Being average is usually nothing to write home about, but the average U.S. stock mutual fund shareholder is sitting on a 21% gain so far this year--a handsome return by any measure. Still, many fund owners know they could have done even better by being in the hottest segments of a hot market. Technology is the obvious one, but in fact this has been a standout year for many non-tech industry groups as well.

Change is a bit slower to come in the 401(k) marketplace than in the mutual fund industry as a whole. But change is coming, nonetheless, in terms of new investment choices for 401(k) plan participants. To be sure, you're not likely to see a "concentrated" Internet fund in your company-sponsored 401(k) any time soon. However, many 401(k) plans are allowing plan participants to be much more aggressive with their retirement money than in years past.

Technology sector funds led the stock market's fourth-quarter rally, but they still finished 2001 with an average loss of 38.3%--the biggest decline of any major fund category last year. Communications sector funds had almost as bad a year, losing 34.6%, on average, according to Morningstar Inc. data. And utility sector funds, once thought of as an investing haven for widows and orphans, tumbled 21.2% in 2001, thanks in part to the hard-hit telecom stocks many of them hold.

Sector funds are enjoying a growth spurt. With relatively little fanfare, the number of health-care, natural resources, technology, telecommunications and financial funds has more than doubled over the last three years, and the number of real estate funds has quadrupled. What's driving the trend is respectable performance as well as a desire on the part of more investors to add a specialized product to their portfolios.

There are close to 500 sector funds today, up from roughly 150 just five years ago. Most sector funds fall into one of two groups: Either they reflect key industries such as technology, health care or financial services, or they offer a diversification play. Diversifiers include the utility, natural resources and real estate funds.

The article, "Greenpeace Assails Record of Waste Management Inc." (May 10), inaccurately implies that few environmentally oriented investment professionals are concerned about the company's ethics. As of Dec. 31, none of the 11 socially screened mutual funds (funds invested according to both social and financial criteria) held Waste Management shares. The reason? The company's spotty ethics and environmental record. "Environmental" funds are not run by, or for, environmentalists.

Beaten-down stock fund sectors led the industry's rebound in the second quarter, but some of the favorite groups during the bear market continued to shine as well. Some of the highlights of the quarter and first half: * Technology sector funds were on top in the quarter and the half, with average total returns of 24.6% and 24.1%, respectively, according to fund tracker Morningstar Inc. in Chicago. Tech stocks' revival, after three devastating years, was led by Internet-related shares.

Investors seeking income are having a difficult time finding it. With the Lehman aggregate bond index yielding a mere 3.57%, neglected multi-sector bond funds offer a relatively safe way to go for higher payouts. Multi-sector funds invest in a wide range of income-oriented securities, including domestic and foreign government bonds, corporate bonds and high-yield debt. The funds' ability to venture into emerging markets and the junk bond sector frightens away some potential investors.

Technology sector funds led the stock market's fourth-quarter rally, but they still finished 2001 with an average loss of 38.3%--the biggest decline of any major fund category last year. Communications sector funds had almost as bad a year, losing 34.6%, on average, according to Morningstar Inc. data. And utility sector funds, once thought of as an investing haven for widows and orphans, tumbled 21.2% in 2001, thanks in part to the hard-hit telecom stocks many of them hold.

Change is a bit slower to come in the 401(k) marketplace than in the mutual fund industry as a whole. But change is coming, nonetheless, in terms of new investment choices for 401(k) plan participants. To be sure, you're not likely to see a "concentrated" Internet fund in your company-sponsored 401(k) any time soon. However, many 401(k) plans are allowing plan participants to be much more aggressive with their retirement money than in years past.

One wild week for mutual funds down. Fifty-one more to go. The stock market finished the week on a strong note, but along the way it reminded fund investors why volatility isn't always their friend. "It was a welcome wake-up call for a lot of investors in high-risk, high-return categories" such as technology, said Ed Rosenbaum, director of research for New York-based fund tracker Lipper Inc.

There are close to 500 sector funds today, up from roughly 150 just five years ago. Most sector funds fall into one of two groups: Either they reflect key industries such as technology, health care or financial services, or they offer a diversification play. Diversifiers include the utility, natural resources and real estate funds.

If anyone needed evidence that any sector mutual fund can be a flash in the pan, it came a couple of weeks ago from the Oppenheimer funds group. That's when the New York firm announced it will ask shareholders in its Global Bio-Tech fund to vote Sept. 19 on a proposal that would change the fund's name and investment strategy, essentially transforming Bio-Tech into a broader emerging-growth portfolio.

Beaten-down stock fund sectors led the industry's rebound in the second quarter, but some of the favorite groups during the bear market continued to shine as well. Some of the highlights of the quarter and first half: * Technology sector funds were on top in the quarter and the half, with average total returns of 24.6% and 24.1%, respectively, according to fund tracker Morningstar Inc. in Chicago. Tech stocks' revival, after three devastating years, was led by Internet-related shares.

Sector funds are enjoying a growth spurt. With relatively little fanfare, the number of health-care, natural resources, technology, telecommunications and financial funds has more than doubled over the last three years, and the number of real estate funds has quadrupled. What's driving the trend is respectable performance as well as a desire on the part of more investors to add a specialized product to their portfolios.

The giant California Public Employees' Retirement System on Tuesday moved to shore up one of its lackluster investment categories--real estate--by delegating more authority to its new property investment chief. Also Tuesday, the retirement fund confirmed that its assets have topped $100 billion for the first time.