Tech mutual funds fall flat in February

Gone are the days of the late '90s when investors preached that technology-oriented mutual funds were a relatively safe way to cash in on the tech frenzy.

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Remember the good ol' days of the late '90s, when investors preached that technology-oriented mutual funds were a relatively safe way to cash in on the tech frenzy without exposing your portfolio to downside risk?

Turns out that philosophy was spectacularly flawed.

In fact, February was the worst month for tech funds since October 1987. The average tech fund lost a stunning 27.9 percent last month alone, according to Chicago-based fund tracker Morningstar. The average tech fund is down 58 percent in the past year.

The losses are particularly gruesome considering that tech funds have a decent track record, having posted gains in every year since 1984. In 1999, tech funds averaged a 136 percent gain. But the gravy train came to a dead halt in 2000, when the average tech fund lost more than 33 percent.

Only seven of the 128 tech funds in Morningstar's database have gained since Jan. 1--and the winners are mainly esoteric, small funds that few investors own.

Even worse: Experts--including people who manage tech funds--say average investors should steer clear of tech funds for the foreseeable future.

"I don't think people should be putting money back into tech funds until they see some bottom and stabilization," said Bill Schaff, portfolio manager for Berger Information Technology Fund. "We've had this mania of people who started investing only in tech--that's all they know. People who are seasoned have become diversified. Funds are bringing down their tech exposure. That's the way it should be."

see Special Report: Assessing the carnage It's no surprise that the technology sector collapse has stung legions of venture capitalists, entrepreneurs, options-holding employees and executives. But the severe downturn of tech funds means that nearly anyone with a 401(k) plan or mutual fund has been stung.

Intel, for example, has become one of the most common holdings. It is in the portfolios of 1,176 mutual funds, and the stock accounts for more than 5 percent of the assets in 127 of those funds, according to recent portfolio data from mutual fund tracker Morningstar.

Intel wasn't the only favorite; tech funds grew fat with record inflows. At least $44.5 billion gushed into tech funds in 2000--just in time for the funds' swift demise.

Fund specialists say the stunning shrinkage of fund value should teach a poignant lesson to investors: Tech fund are high-risk funds, regardless of the soaring gains in the 1990s.

"People assumed the most optimistic possible growth curves were going to last on and on into infinity," said Christopher Traulsen, senior analyst at Morningstar. "The economy has thrown a monkey wrench into that scenario, and I think that's healthy to the extent it's driven home the reality of risk.

"Tech mutual funds always have been for high-risk investor--I really do believe that," Traulsen said. "I think people got swept up in trying to go after triple-digit returns, but we've been saying that these are risky as all get-out and they should only be for people who can tolerate volatility."