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.
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.
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 (http://www.sterlingmutuals.com/Telus_Aggressive_05oct2001.htm),
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 (http://www.sterlingmutuals.com/Telus_ReportCard_04jan2002.htm),
I suggested taking profits in tech stocks since they’d risen so quickly and
unexpectedly.
So, what
should you do if you’re sitting on big losses in a bunch of tech funds?
ź
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.
ź
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.
ź
If you
want pure tech exposure, look instead at some good labour sponsored funds (http://www.sterlingmutuals.com/Telus_LSIF_I_22mar2002.htm)
– 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.
ź
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.
ź
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.
ź
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, B.Comm., CFP, CFA is the Senior
Investment Analyst with Sterling Mutuals Inc. He can be reached at dhallett@sterlingmutuals.com Sterling Mutuals Inc. is registered as a
mutual fund dealer in Ontario, British Columbia, Alberta, and Manitoba.