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Tech Funds: A mistake if you had invested
In this article, the third in our series on sector
funds, we discuss the performance of the infamous technology funds. With
the benefit of hindsight, of course, they are infamous. But in the first
quarter of 2000 they were a rage; and why not? The doubled your money in
less than three months then!
In the 1999 and early 2000 period,
Technology-Media-Telecom (TMT) stocks were the stock market favourites. In
case of technology and related companies, the view that outsourcing to
India will grow rapidly (estimates ranged at times more than 100% pa
growth for many years to come) boosted sentiment to such levels that the
valuations of these companies reached stratospheric levels. Then of course
there was this hype about the internet and the services (hardware and
software) adding to the mania. In those days any company that announced a
venture/initiative which had an “e” as a prefix or “technology” as part of
its name, saw its stock price sky rocket. Making money on the stock
markets was easy; all you had to do was invest in companies from the TMT
sectors.
But as it always happens, rationality returned to the
stock markets. The ‘punters’ realised that their estimates of growth
(which were in any case a lot higher than what the well-managed companies
expected!) are unachievable. In a lot of cases the realisation was that
the companies never even pursued the businesses which their names seemed
to suggest! Valuations of companies were marked down as overall sentiment
took a beating and what you had was probably the worst bear market in
recent history. Since our aim in this note is not to discuss the TMT
meltdown, we will not delve into this much more.
The point to note here is that you made a lot of money
if you had timed your entry and exit in a tech fund to perfection; you
could have probably doubled your money in three months. But in case you
had erred, you lost a packet. And why that hurts is because if you had
invested wisely, even at the height of the mania, you could still have
made a very attractive return by simply remaining invested for a 5-Yr
period in a well managed diversified equity fund. Just to put some numbers
to this – your investment in a diversified fund like HDFC Equity would
have grown by 2.5x, while that in a tech fund would still be down 50%! On
a point to point basis, over these seven and a half years, an investment
in HDFC Equity Fund has grown by 6.7x; the best performing tech fund on
the other hand has grown to just 1.4x. The graph below illustrates this –
Another point to note is that at all points in time there were
opportunities in the TMT sector which were also attractive from a
valuation perspective. However, there were not enough of them to justify
an investment via a fund that had to invest all its monies in these
sectors only. Such a fund took away the flexibility from the fund manager
to “not invest” when he did not find attractive opportunities (a couple of
funds of course were simply punting with the investors’ money – we are not
considering such funds here). He had to in other words remain invested as
the whole stock price cycle went up and then came all the way down. In
case of a well managed diversified equity fund, this flexibility was
there, and they used it to their advantage.
In this article, as also our article on pharma funds, we have been
attempting to guide you, the investor, from not going overboard when it
comes to investing in sector funds. We recommend that you avoid these
funds; but invest if you must, then ensure that the exposure to such funds
does not exceed 5%-10% of your portfolio. When making the allocation keep
in mind that a well managed diversified equity fund will anyways own
stocks from sectors that hold attractive prospects.
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