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To halve and to hold
What to do with decimated tech investments

I've spoken with many individual investors and financial advisors recently. By far the most often asked question is, "What should I do with my technology funds?" Most technology fund investors have lost at least half of their money in such funds, leaving many stunned by this bear market. Some might think the worst is over (as they wrongly did last December) and opt to hold on through the eventual recovery. Others see a flat or downward market for many more years. I'd say reality sits somewhere in between.

Get back to the basics

The best starting point has to be to start anew. Really think about what you want your money to do for you. Write down your objectives - and do your best to make those are realistic. Then make note of things like how long before you start using your portfolio for income; how much risk you're willing to take; how much risk you need to take; and other things affecting your investments, like taxes.

This should give you some idea of the type of asset mix strategy (i.e. how you allocate your money between stocks, bonds, and cash) you'll need. For instance, people taking regular cash withdrawals from their investments should have a healthy bond/cash component - and minimal exposure to specialty funds (like small cap momentum funds and any fund emphasizing specific business sectors) - to ensure stability.

In other words, determining your asset mix strategy is like deciding on a destination for your vacation. Once you figure out your destination point, you're well equipped to pick a mode of transportation and book your tickets. However, many investors do the equivalent of buying a plane ticket before figuring out where the heck they're going and how long it'll take to get there.

Comparing "where you should be" with "where you are", in terms of asset mix, will give you at least a general idea of what changes, if any, you'll need to consider.

Then it will be time to delve into the specific holdings in each component.

The technology view

Let's assume your overall mix of stocks, bonds and cash is suitable but that, like many, a disproportionate amount of your stock component is tied to funds pursuing a technology mandate.

I would get rid of funds with a specific mandate of investing in technology stocks. Sure, tech stocks have been pummeled and buying them now could be seen as a contrarian move. However, my views on tech stocks, in general, are not positive. I get the feeling that there's some built-in expectation that a) technology will be the next great growth sector, again; and b) that the same big companies will dominate again like they did a few years ago.

I have a problem with that because a winning sector rarely repeats in consecutive cycles; but even when it does it's usually not lead by the same cast of characters. What are money managers are holding these days.

Growth managers generally look for companies that are on a roll - with respect to their earnings, revenues, and upward revisions of forecasts thereof - or that appear to have a bright future three to five years ahead of them. (And they're not afraid to pay a high price today for the potential of that future growth.) Such managers held a healthy chunk of tech stocks throughout the mid-to-late 1990s. Today, these managers hold little to nothing in pure tech stocks. For the most part, growth managers' tech holdings currently range from zero to less than fifteen per cent. That's a far cry from the 40 to 75 per cent tech weighting many of these managers had at the height of the tech frenzy.

The currently low weighting reflects the fact that corporate spending on technology equipment remains depressed, with no visible recovery. Further, revenues continue to sag and companies continue to revise their projections downward. No wonder managers using a style called "growth" have no interest in this sector.

I do think tech will eventually come back, but I don't think it will be anytime soon; and I don't think it will be as widespread as the rise of the late 1990s.

In this October 2001 article , I recommended that aggressive investors should start treading back into tech stocks, with the idea that they'd start stabilizing again in 2002. However, tech stocks promptly soared during the last three months of the year from the post-September 11 lows. Hence, when I revisited this issue in my first article of 2002 , I suggested taking profits in tech stocks since they'd risen so quickly and unexpectedly.

Food for thought

So, what should you do if you're sitting on big losses in a bunch of tech funds?

  • Focus the core of your equity funds on managers with a value-oriented stock picking style. That will probably require biting the bullet on some beaten up tech funds, but great value managers have started selectively (that's the key word) buying telecommunications stocks. Managers such as Brandes Investment Partners, Cundill, and Templeton Global Advisors are three terrific examples of respected value managers that have boosted their stakes in telecom stocks lately.
  • Make sure specialty and aggressive funds account for no more than 10 to 15 per cent of your total portfolio. The idea here is that if you're over-exposed to aggressive investments, you shouldn't have held so much in the first place - so cut it down.
  • If you want pure tech exposure, look instead at some good labour sponsored funds - like Working Opportunity in BC, Working Ventures, or Vengrowth. These funds focus on tomorrow's industry leaders and each has a big tech weighting. They're not for everybody, but they're worth a look.
  • Don't discount the value of fixed income. While interest rates are low and likely to rise (bad for government bonds), good opportunities exist in corporate bonds. Also, it's not a bad idea to maintain a higher than average weighting in cash - either through a money market fund or via a high interest savings account.
  • Don't make investment decisions for the future based on your recent past experience. The fact that many investors have lost 70 per cent on some tech funds doesn't mean the sector's set to rise. An investment's future potential has nothing to do with where it was purchased.
  • Most importantly, remember that the above tips are somewhat general in nature. It's critical to ensure that, at the end of the day, your portfolio is structured in a manner that reflects what you need your money to accomplish for you. It's a message that I've often mentioned in this space, but judging from the portfolios I've seen recently, not often enough.

    Dan Hallett, CFA, CFP is the President of Dan Hallett & Associates Inc. in Windsor Ontario. DH&A is registered as Investment Counsel in Ontario and provides independent investment research to financial advisors. He can be reached at dha@danhallett.com
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