By David Randall
NEW YORK May 7 Long considered the best option
for growth investors, technology funds have lost some of their
edge. It may be time to reconsider how they get quickly
expanding companies in their portfolios.
It's not just that many technology funds have large stakes
in Apple Inc, whose shares have fallen nearly 23
percent over the last year as it lost share of the worldwide
smartphone market to Samsung Electronics Co Ltd.
Instead, the industry is facing a larger problem: it's no
longer filled with young companies whose best days are ahead.
Now, nearly all major technology providers except for Google Inc
pay a dividend, an admission of slowing growth that
would have been unthinkable during the dot-com boom of the late
"The last thing these tech companies want to be called is
old and mature. I don't want to be called old and mature either.
But at some point, that's what I am," said Mark Freeman, a
co-manager of the $1.1 billion Westwood Income Opportunity Fund
Add it up, and investors are left with a sector that is
rapidly shedding its high-wired growth characteristics and
settling into boring middle age.
While prospects of higher dividend payouts from tech
companies could be good news for investors who want income, the
shift could harm those who were counting on technology stocks to
provide the growth to their portfolios. Surprisingly, investors
can look to two traditional sectors for a boost: Consumer
discrectionary and energy funds.
"Investors are probably thinking they're getting something
from these tech funds that they're not," said Todd Rosenbluth,
director of mutual fund research at S&P CapitalIQ.
There are several signs that the technology sector is aging.
Overall, 31 technology firms rated by Moody's will pay out
dividends this year, compared with just 20 in 2007. All told,
tech companies will send $44.4 billion in dividends to
shareholders in 2013, a 35 percent increase from last year. And
slowing earnings growth and large cash hoards earning little to
no interest for shareholders will likely prompt companies to
increase their payouts in the future as well, noted Richard
Lane, a senior vice president at Moody's.
Apple posted its first quarterly decline in profits in more
than a decade when it announced results on April 23. The
slowdown in earnings growth looms large over the sector as a
whole because many tech funds have a large stake in Apple.
With more than $145 billion in cash at hand and a price to
earnings ratio well below the market average, many investors now
consider the company more of a value stock, the term for a stock
that trades lower than its fundamentals because investors expect
its growth to wane.
"With increased competition, there's just no way that the
company can keep up its growth rate like in the past," said
Derek Gabrielsen, a financial planner at Strategic Wealth
Partners, a Seven Hills, Ohio-based firm with $175 million in
assets under management.
Freeman, the co-portfolio manager of the Westwood Income
Opportunity Fund, said that Apple's share price may lag while
its shareholder base makes a transition from growth investors to
value investors. Apple may find itself in a similar position to
Microsoft Corp, Freeman said, whose stock price has
gained only 28 percent over the last 10 years since it initiated
a dividend in early 2003. Apple shares, by comparison, were up
nearly 5,000 percent over the same time.
GROWTH WITH CONSUMER AND ENERGY STOCKS
Consumer discretionary and energy stocks may be better
options for investors looking to add growth to their portfolios.
Each sector has been turning in the most surprising growth
rates compared with Wall Street's estimates. Through Friday,
some 76 percent of companies in both sectors had topped analyst
expectations over the most recent earnings season, according to
Thomson Reuters data, more than any other sector.
Consumer discretionary stocks - the group of retailers,
hotels and restaurants - pays an average yield of 1.6 percent,
compared with an average of 1.8 percent among tech companies,
according to S&P data. And even with lower dividend payments,
consumer stocks have rewarded investors: the average consumer
discretionary fund has returned an annualized 9.6 percent over
the last five years, while the average tech fund returned 5.4
percent a year over the same time frame, according to
Consumer discretionary funds are outperforming this year as
well. The average consumer discretionary fund is up 16.9 percent
for the year through Friday, compared with an 8.1 percent gain
for technology stocks. Overall, the average stock fund has
returned nearly 11 percent since the beginning of the year,
according to Morningstar.
Investors who want to tap the sector could opt for a fund
like the $783 million Vanguard Consumer Discretionary Index fund
. The fund, which costs $0.14 annually per $100
invested, is up 17.2 percent for the year and yields 1.2
percent. Its largest holdings include Home Depot,
Amazon.com Inc, and McDonald's Corp.
Energy companies will likely perform well as the global
economy improves, noted Phil Orlando, chief equity strategist at
Federated Investors. U.S. unemployment fell in April, while the
rate of government job losses slowed, both of which should lead
to increased consumption of energy by workers and businesses
The Energy Select SPDR ETF is one cheap way to
increase exposure to the sector. The $7.5 billion ETF, which
costs $0.18 a year per $100 invested, is up 12 percent for the
year. Its top holdings include Exxon Mobil, Chevron Corp
and Schlumberger NV.