The demise of technology funds over the past 12 months has been well documented Ã valuations were to...
The demise of technology funds over the past 12 months has been well documented Ã valuations were too high and unsustainable, profit warnings and downgrades came one after another, dot.com companies collapsed and market sentiment turned away from high growth technology stocks.
The momentum was no longer there. The fall reaffirmed the frequently quoted industry phrase 'past performance is no guarantee of future returns and the value of investments can fall as well as rise'.
A positive aspect of the fall is that it has been indiscriminate and there will be some good stockpicking opportunities for technology fund managers.
Clearly investors who had invested in just technology funds towards the end of the tax year are nursing some heavy losses.
The returns achieved by technology funds since 1 March 2000 has been disappointing but understandable. All did poorly and Framlington's NetNet fund, the worst performer in the sector, returned -74.84%, on a bid to bid basis from 1 March 2000 to 26 March 2001.
Diversification within the specialist sector can be achieved by investing in more than one theme, providing sector and market diversification and reduced volatility.
A look at the returns achieved from funds focusing on the financials theme over the same period reveals a contrasting picture. Financials funds produced some of the best returns within the sector: S&P Financial Securities 30.2%, Jupiter Financial Opportunities 24.33%, Hill Samuel 18.92% and Framlington Financial 12.21%.
What's more, the volatility of these funds on average is less than half that of technology funds and the correlation between them is low.
The picture would not be complete without a comparison of these returns against the sector average, MPAL UT Specialist, and a broader index such as the FTSE Act World Index.
The returns for these were -33.64% and -11.37% respectively technology underperformed while financials outperformed. A combination of the two themes would have reduced the impact of poor performance in technology.
In summary, the specialist sector is not for novice investors, but for those who already have a broadly based balanced portfolio, wishing to add one or more themes to it. Any sharp fall in the theme fund's value will be buffeted by their existing balanced portfolio.
Investors must try to avoid the pitfall of investing at the top of the cycle as was the case with technology last year - not easy but possible if care is taken to study valuations.
Raj Hallen is investment manager (Pooled Funds) at Premier Fund Managers
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