Although they sport the best 5-year average returns, communications and technology sector funds have been the worst performing fund categories over the past three and 12-month periods. The average technology fund is down 24.4% for the 3 months and down 44.7% for the 12 months ended 2-16-01, according to data from Morningstar. The average communication fund has lost 19.0% for the 3 months and is off 37.8% for the 12 months ended 2-16-01, per Morningstar.
Time to buy? Well that's up to you to decide, but the thing to keep in mind is that the best buying opportunities are found when everyone else is selling. Too many investors buy into the hot-performing fund sector toward the end of its current run-up, and are disappointed when another sector takes the limelight in subsequent periods. If you truly want to buy low and sell high, you may want to think about investing in growth sectors now, while they are beaten down. While the valuations of many tech and telecomm stocks are still relatively high, they are much more reasonable today than they were at the peak of the technology cycle in late 1999, early 2000 when investors were chasing the hot tech sector.
That's not to say that buying into telecomm and technology sector funds come risk free. All you have to do is watch the market recap on TV and you'll see that tech titans like Nortel Networks, Motorola, Dell and HP have been lowering their 2001 profit projections and causing technology to sell off. These sectors may continue to correct in subsequent weeks and months, but at some point they will turn upward again. Thus we see this upcoming period as possibly a time to accumulate in these sectors, provided however, you have a long-term horizon and are risk-tolerant as there may be more pain before the next advance.
For our telecommunications and technology sector fund screen, we began by eliminating funds with high standard deviation (meaning volatility) and high price-to-earnings (P/E) ratios within these two fund sectors. The notion behind this decision was to have funds that can participate in the next advance, but also would better protect you to the downside in the event these market sectors get worse before they improve again. This tilted our screen to lower-risk funds and value approaches within the telecommunications and technology sectors.
That did not leave much, since so many of these funds are volatile and growth-oriented in their approach. Still, we found a couple that make the grade, both from the ICON family of pure-sector funds. In telecomm we like ICON Telecommunication & Utilities Fund (ICTUX) and in the tech sector we like ICON Information Technology Fund (ICTEX). These two are part of ICON's series of pure-sector funds, meaning that they invest in that sector only. Sector funds typically invest two-thirds or more of the portfolio's assets in the sector, but can buy non-sector stocks as well with the other one-third of assets. This can be a source of value added or it can detract value relative to its sector fund peers. ICON believes that when people invest in a sector fund, they expect to be in that sector and not some unknown ground. That allows investors to make better decisions about their overall fund structure.
The two ICON sector funds have a lot in common. Both are true no-load fund offerings, meaning they carry no front or back-end load fees, nor 12b-1 marketing fees. And both have annual operating expenses in line with their sector peers.
Both seek to provide long-term growth of capital and maximum after-tax performance, meaning they seek to minimize capital-gains distributions to shareholders by keeping the portfolio's turnover rate low and trying to offset portfolio gains and losses prior to distribution. Each has the strategy of focusing on industry rotation within the sector, using a value approach, with a minimum of 2-3 industries for diversification. Finally, a team of professionals manages both ICON funds, preferring to make decisions collectively rather than allowing one individual to make the fund's investment decisions.
ICON Selection Process
Each fund is comprised of industry-specific baskets of securities based upon their research for stocks in such industry. Since stocks in these industries can be influenced by random, unpredictable events, ICON aims to mitigate such randomness by defining basics that capture the essence of an industry. In other words, they seek out stocks that tend to move together within the industry, as opposed to an outlier that may be less representative of what's happening within the industry.
In selecting and weighting of companies for inclusion in each industry basket, ICON looks for companies exhibiting high earnings growth, good balance sheets, pricing flexibility, strong management, liquidity, and other operating characteristics that'll enable the companies to compete successfully within their respective markets. Decisions on individual stocks are based on ICON's proprietary research and investment methods. This represents the bottom-up part of the selection process.
Investment selection and weighting of industry baskets within a sector fund are based on relative industry attractiveness. ICON employs a proprietary valuation model to analyze a universe of 1,700 large, mid and smaller company stocks for their intrinsic value. This model uses classic valuation criteria in addition to methods developed by Benjamin Graham, considered to be the "father of security analysis." Namely, it looks at factors such as historical and estimated future earnings, long term earnings growth estimates, risk, current and future interest rates and current stock price to ascertain a stock's worth.
ICON's management team then classifies stocks into their representative industry groups, to determine those industries deemed to be attractive relative to other industries. ICON also believes that advances in the world's financial markets are defined by themes. By combining the most attractive industries and weighting them properly, ICON believes it can outperform the broad sector benchmarks over the long run, because these undervalued industries are usually the leaders when new themes emerge. This represents the top-down part of the selection process.
All management decisions for the two ICON sector funds are discussed at the committee level. Members of the research team present quantitative data and investment recommendations to the committee, which then agrees on the industries within each sector to emphasize based on the research and economic themes. The portfolio managers are then responsible for selecting the baskets of securities in each industry. Once decisions are reached, the trading department executes the trading instructions.
The selection process results in sector portfolios that include only the industries and stocks with the best potential at the best prices.
ICON Telecommunication & Utilities Fund (ICTUX)
This tiny $13 million sector fund includes seven S&P industry groups:
- Wireless telecommunications
- Integrated telecommunications
- Alternative carriers
- Electric utilities
- Gas utilities
- Water utilities
- Multi-purpose utilities
As stated above, the fund strategy focuses on industry rotation within the telecomm sector, using a value approach, generally with a minimum of 2-3 industries for diversification. A basket of stocks is selected to achieve industry exposure. The fund's value bias has worked to its favor over the trailing 12 months. Its 7.5% return of the past 1-year through 2-16-01 lands it in the top 1 percent within the communications fund sector according to Morningstar - the only communications fund to realize a gain during the past year. To put the fund's performance in perspective, consider that the average communications sector fund lost 37.8% over the same period, and the next highest individual fund return was a negative 9.3%. At 1.59%, the fund's expense ratio is comparable to the average communication fund's 1.51% expense ratio.
ICON Information Technology Fund (ICTEX)
This $36 million fund invests in a dozen S&P industry classifications:
- Semiconductors
- Semiconductor equipment
- Telecommunications equipment
- Networking equipment
- Electronic equipment and instruments
- Office electronics
- Computer hardware
- Computer storage and peripherals
- Application software
- Internet software and services
- Systems software
- IT consulting and services
Like its sibling, the ICON strategy focuses on industry rotation within the technology sector, using a value approach, generally with a minimum of 2-3 industries for diversification. This fund has also used a value approach to post peer-busting returns over the past year, gaining 2.9%, compared to a loss of 44.7% for the average technology sector fund. It was one of only three funds to post a gain over the trailing 12 months ended 2-16-01, according to Morningstar. At 1.37%, the fund's expense ratio is significantly below the technology category average of 1.80%.
Conclusion
If you're a risk tolerant investor with lots of time on your side, the ICON funds shown herein may be worth your consideration. Growth stocks and funds are currently out of favor, with value stocks and funds doing well on a relative basis. With many pundits saying that the technology correction may have a ways to go before improving, having a value tilt can lower downside risk while providing the opportunity to participate to the upside. ICON's industry rotation and stock picks have done well in the past year in these sectors, proving you do not have to be big to do well. For more information, visit ICON's site at www.iconfunds.com.
