Technology funds were the big "must haves" in the last individual savings account selling season. Now many investors are doubting that particular piece of financial adviser wisdom. Many bought at the top of the boom: some have lost up to 60% of their money.
Now, however, the funds could be due for a comeback. Basing their marketing appeal on stratospheric past performance figures, discount brokers sold the specialist unit trusts by the million. But the mid-March madness in technology markets, both in the US and Britain, coincided with the Isa sales high point. Since then, the UK-based FTSE Techmark 100 index of medium and smaller-sized technology companies has fallen by 40% - and the US Nasdaq by around a third.
Aberdeen Technology and Henderson Global Technology, the two biggest technology funds and both heavily sold last spring, have fallen 27% and 13% respectively since their peak. SG Asset Management's smaller fund has also given many Isa investors a torrid time.
It is not just small investors who have been caught out. The largely institutional shareholder list of Aberdeen European Technology and Income split level investment trust have seen their money drain away. This trust raised £200m in January, matching it with a further £200m loan from Bank of Scotland. But now it is raising a further £45m to prevent lenders calling in their money. The capital growth shares have crashed from 15p to under 5p, while the income shares have collapsed from 85p to 52p.
Matters have not been helped by the gearing, which magnifies problems, and the fund's reliance on junk bonds to produce a high income. Framlington's highly hyped NetNet fund rocketed from 50p at launch in May 1999 to £1.51 in March 2000. Now it is trading at 66p. As Framlington delicately puts it: "Some investors are nursing a reduction in the value of their investment."
But now technology funds are attempting a comeback. The £1.5bn Aberdeen Technology and the equally sized Henderson are striking out in new directions.
And two new unit trusts aimed at tracking technology indexes are launched this weekend with offerings from both Legal & General and Close Brothers. SG is offering a mix'n'match Eurotech Isa with 50% going into the technology trust and half directed to European Growth.
Henderson's fund hit question marks after the resignation of the two main fund managers, Brian Ashford-Russell and Tim Woolley, quitting to set up their own operation. But while ratings agency Standard & Poors expects new fund manager Nitin Mehta to be as successful, doubts remain.
Mr Mehta has no doubts. "This fund has been around for 10 years. We did dip in March but we are ahead over the past six months," he says. His first-division performance has been based on switching heavily into what he expects to be the next big trends. More than 70% of the trust is US shares.
Around a third of the fund is in "enterprise software" - shares such as BEA Systems and SBL Systems. These US companies make their profits from the links between a firm's in-house system and the internet.
A second 30% slice is in "next generation networks" - companies such as Nortel Networks, Juniper and Ciena.
"These firms sell technology which effectively makes phone wires fatter so more information can be squeezed through at faster speed. We are in a hyper-demand phase for these products," he says.
The flipside is what is left out or downsized. "We have little in computer hardware stocks such as Dell, Compaq, in semi-conductors such as Intel or Texas Instruments, or in Microsoft which has become too mature for us - and has problems shipping Windows 2000," Mr Mehta adds.
At Aberdeen, fund manager Ben Rogoff puts faith in DWDM, dense wave division multiplexing, which can increase phone line capacity by 192 times. "You've got to look for the next system bottleneck and find firms with a solution. Phone companies then have no option but to buy this kit. Internet security is also a big theme," he says.
Active fund managers believe that tracking a market where product lives can be as little as six to nine months means ending up with technological dinosaurs.
Legal & General stayed out of technology last spring because L&G strategist David Rough "doubted prospects in the midst of dot.com madness". Now prices have fallen to "more sensible levels".
"Our technology index fund offers lower risk, lower charges and global diversification," says L&G's Michael Hayden. The fund tracks the FTSE World Index technology section which is published daily.
And Close Brothers, which already has an index fund based on Techmark, is launching a European technology tracker based on the FTSE eTX 50.
"This fund avoids huge holdings in Microsoft and Intel - this way you can profit from targeting specialist stocks in the tier beneath established global giants without worrying about fund manager bias. And you could gain further if the euro is near its bottom," says Close's Marc Gordon.
